UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20‑F

OR

For the fiscal year ended December 31, 2019*

OR

For the transition period from                            to                           

OR

Date of event requiring this shell company report

Commission file number:  001-38051

China Rapid Finance Limited

(Exact name of Registrant as specified in its charter)

N/A

(Translation of the Registrant’s name into English)

Cayman Islands

(Jurisdiction of incorporation or organization)

Room 7-705, Zhongjidasha Plaza  

819-1 Yinxianglu Road, Nanxiang Township

Jiading District, Shanghai, 201802

People’s Republic of China

(Address of principal executive offices)

Hao (Kevin) Chen (Chief Financial Officer)

Email:  IR@crfchina.com

Telephone:  +86-21-6032-5999

(Name, Telephone, E‑mail and/or Facsimile number and Address of Company Contact Person)

*Not for trading, but only in connection with the listing on the New York Stock Exchange of American depositary shares

Securities registered or to be registered pursuant to Section 12(g) of the Act:  None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:  None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock at the close of the period covered by the annual report.  

104,054,977 Class A ordinary shares

9,401,180 Class B ordinary shares

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the US Securities Act of 1933, as amended.

Yes  ☐    No  ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not 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.

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.  ☒

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:  

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  ☒

EXPLANATORY NOTE

On March 4, 2020 the Securities and Exchange Commission issued an Order (Release No. 34-88318) under Section 36 of the Exchange Act granting exemptions from specified provisions of the Exchange Act and certain rules thereunder (the “Order”). The Order provides that a registrant subject to the reporting requirements of Exchange Act Section 13(a) or 15(d), and any person required to make any filings with respect to such a registrant, is exempt from any requirement to file or furnish materials with the Commission under Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(c), 14(f), 15(d) and Regulations 13A, Regulation 13D-G (except for those provisions mandating the filing of Schedule 13D or amendments to Schedule 13D), 14A, 14C and 15D, and Exchange Act Rules 13f-1, and 14f-1, as applicable, where certain conditions are satisfied.

As a result of the global outbreak of the COVID-19 virus, from January 2020 until February 2020, the Company’s employees have been asked to work remotely. As a result, the Company’s books and records have not been easily accessible and communication among internal financial staff and its auditors has been challenging due to the travel restriction and quarantine requirement, resulting in the delay in the preparation and completion of its consolidated financial statements. Based on the foregoing, on April 30, 2020, the Company filed a Current Report on Form 6-K to avail itself of a 45-day extension to file this Form 20-F relying on the exemptions provided by the Order. This Form 20-F is being filed in reliance on the Order.  

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INTRODUCTION

Unless otherwise indicated or the context otherwise requires in this annual report:

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FORWARD‑LOOKING STATEMENTS

This annual report on Form 20-F contains forward-looking statements that reflect our current expectations and views of future events. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to:

We would like to caution you not to place undue reliance on these forward-looking statements and you should read these statements in conjunction with the risk factors disclosed in “Item 3. Key Information—D. Key Information—Risk Factors.” Those risks are not exhaustive. We operate in an evolving environment. New risks emerge from time to time and it is impossible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in any forward-looking statement. We do not undertake any obligation to update or revise the forward-looking statements except as required under applicable law. You should read this annual report and the documents that we reference in this annual report completely and with the understanding that our actual future results may be materially different from what we expect.

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Part I

Not applicable.

Not applicable.

The following table presents the selected consolidated financial information of our company. The selected consolidated statements of comprehensive income data for the years ended December 31, 2017, 2018 and 2019 and the selected consolidated balance sheets data as of December 31, 2018 and 2019 have been derived from our audited consolidated financial statements included in this annual report beginning on page F-1. The selected consolidated statements of comprehensive income data for the years ended December 31, 2014 , 2015 and 2016 and the selected consolidated balance sheets data as of December 31, 2014, 2015 , 2016 and 2017 have been derived from our audited consolidated financial statements not included in this annual report. Our audited consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. Our historical results do not necessarily indicate results expected for any future period. You should read the following selected financial data in conjunction with the consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.  

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The following table presents our selected consolidated statement of comprehensive income for the years ended December 31, 2015, 2016, 2017, 2018 and 2019.

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The following table presents our selected consolidated balance sheet data as of December 31, 2015, 2016, 2017, 2018 and 2019.

Exchange Rate Information

Our business is primarily conducted in China and almost all of our revenues are denominated in RMB. However, periodic reports made to shareholders will include current period amounts translated into U.S. dollars using the then current exchange rates, for the convenience of the readers. Unless otherwise noted, all translations from RMB to U.S. dollars and from U.S. dollars to RMB in this annual report were made at a rate of RMB6.9618 to US$1.00, the exchange rate set forth in the H.10 Statistical release of the Board of Governors of the Federal Reserve System as of December 31, 2019, the last business day of 2019. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade.

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The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. The source of data in the table is the Federal Reserve official website.

Not applicable.

Not applicable.

Investing in our ADSs involves a high degree of risk. You should carefully consider the following risks, as well as other information contained in this annual report, before making an investment in our company.  The risks discussed below could materially and adversely affect our business, prospects, financial condition, results of operations, cash flows, ability to pay dividends and the trading price of our ADSs.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, prospects, financial condition, results of operations, cash flows and ability to pay dividends, and you may lose all or part of your investment.

Risks Related to the legacy marketplace lending platform business, as well as our transition to the business of facilitating institutional lending capital

As the regulatory framework for our business has been quickly changing, we are transitioning from the legacy marketplace lending platform business, into a business of facilitating institutional lending capital. We no longer match borrowers with retail investors. We continue to use our proprietary decisioning technology, including predictive selection technology, and automated decision technology, to act as a third party service provider for financial institutions, to help them facilitate their lending capital to make loans to the borrowers we solicited, for which we evaluate potential borrowers’ creditworthiness, provide analytical screening and marketing services, and also provide portfolio management services, including loan collection services. See “Item 4. Information on the Company—B. Business Overview—Business Transition.” for the description of our business of facilitating institutional lending capital.

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As the regulatory framework for the legacy marketplace lending business and for our facilitating institutional lending capital business continues to evolve, domestic and foreign governments may continue to propose and adopt new laws, regulations, notices or interpretive releases to regulate our legacy marketplace lending platform and facilitating institutional lending capital business, including our services, and our online and mobile-based channels, which may negatively affect our business.

The online lending industry in China has a relatively short history and relevant laws and regulations are developing and evolving. Since mid-2015, the PRC government and relevant regulatory authorities have issued various laws and regulations governing the online lending industry, which regulate the activities of online lending intermediaries, online microcredit companies, and those who collaborate with these entities in operating online lending platforms. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to the Online Lending Industry.” There are new and sudden changes and uncertainties as to the interpretation of these PRC laws and regulations and their applicability to our business. If any aspect of our operations is deemed to have violated these laws or regulations, we may be required to modify or even suspend relevant operations and/or be subject to administrative penalties. These laws and regulations, which include the following, may adversely affect our business and results of operations in the future.

In July 2015, ten PRC central government ministries and regulators, including the PBOC, the China Banking and Insurance Regulatory Commission, or the CBIRC, the Ministry of Finance, the Ministry of Public Security and the Cyberspace Administration of China, together released the Guidelines on Promoting the Healthy Development of Online Finance Industry, or the Guidelines, which provide regulatory principles for online financing businesses, including those in the online lending industry.  

In August 2016, the CBIRC and other regulators collectively announced the Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries, or the Interim Measures, which proposed the implementation of new requirements including, among others, filing, reporting, fund depository, risk and information disclosure, loan management and the permitted business scope for participants in the online lending industry. Specifically, the Interim Measures introduced a record-filing and licensing regime, which requires online lending information intermediaries to (i) make relevant record-filing with local financial regulatory authorities for their online lending information services; (ii) apply for the relevant telecommunication service license after the completion of record-filing with local financial regulatory authorities; and (iii) specify online lending information services in their business scope.

In November 2016, the CBIRC, the MIIT and the State Administration of Industry and Commerce (“SAIC”), jointly issued the Guidance to the Administration of Filing and Registration of Online Lending Intermediaries, or the Guidance of Administration, which provides general filing rules for online lending intermediaries, and authorizes local financial regulators to make detailed implementation rules regarding filing procedures according to their local practices.  

In 2017, certain local financial regulators published the implementation rules or consultation drafts, which specified the local filing requirements. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to the Online Lending Industry.”  In February 2017, the CBIRC released the Guidance to regulate funds depositories for online lending intermediaries, which defines several obligations and responsibilities of online lending intermediaries and commercial banks involved in the online funds depository business.  See “Item 4. Information on the Company— B. Business Overview—Regulation—Regulations Related to the Online Lending Industry.”  Nevertheless, it is uncertain as to how the Interim Measures will be further interpreted and implemented.  

In August 2017, the CBIRC released the Guidance to regulate information disclosure of online lending intermediaries, which defines several principles, obligations and responsibilities of online lending intermediaries with respect to the disclosure of information. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to the Online Lending Industry.”  

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In December 2017, the Office of the Leading Group on Special Rectification of Risks in Internet Finance and the National Rectification Office jointly released the Notice on Regulating and Rectifying “Cash Loan” Business, or Circular 141, and the National Rectification Office released the Notice on Inspection and Acceptance of Specific Rectification of Risk of Online Lending, or Circular 57. Circular 141 and Circular 57 specified requirements for online lending intermediaries. Circular 57 required online lending information intermediaries to complete their record-filing with the local authorities by the end of June 2018. Since 2017, local regulators have been conducting thorough investigations and inspections of online lending intermediaries, including us, and require a rectification if non-compliance is discovered.  

In addition, the local regulators have also issued detailed checklists of guidelines or instructions, which reflect the local implementation practices.  See “Item 3. Key Information—D. Risk Factors—Some aspects of our operations need to be modified to comply with existing and future requirements set forth by the CBIRC or laws or regulations promulgated by other PRC authorities regulating the online lending industry in China.”  

In August 2018, the Leading Group for the Rectification and Inspection Acceptance of Risk of Peer-to-Peer Online Lending Intermediaries issued the Notice on Launching Compliance Inspection on Peer-to-Peer Online Lending Information Intermediaries, or the Inspection Notice, which required online lending information intermediaries to complete compliance inspections (including self-inspection, inspection conducted by local and national Internet Finance Associations and verification conducted by the rectification office in charge of online lending) by December 2018 pursuant to the Inspection Notice, and the Unified National Compliance Checklist for Online Lending Information Intermediaries as specified in the Inspection Notice.  Based on the results of the compliance inspections, systems of online lending information intermediaries who are in compliance with the applicable rules and regulations can be integrated to industry-wide information disclosure systems and product registration systems. Upon completion of such integration, the online lending information intermediaries will be able to submit filing applications for record-filings pursuant to detailed procedures to be issued by the competent regulatory authorities. After the promulgation of the Inspection Notice, the local and national internet finance associations and the rectification office conducted inspections and verifications of our online lending information intermediary operations. We also submitted our self-inspection report to the local rectification office and our compliance inspection report to the relevant internet finance associations.  

On December 19, 2018, the PRC government issued the Opinions on Classified Disposal and Risk Prevention of Online Lending Intermediaries (Circular No. 175). These opinions require certain online lending institutions to exit the marketplace lending industry.  

On January 23, 2019, the PRC government issued the Notice on Further Implementing the Compliance Inspection and Follow-up Work of P2P Online Lending (Circular No. 1), which required that all lending platforms have to strictly follow the "triple reductions" policy, which was for all platforms, to reduce the total outstanding lending capital, reduce the total number of borrowers, and reduce the total number of investors.  If a platform fails to follow the triple reduction policy, its operations will be forced to cease until the platform is in full compliance.

In furtherance the rules and policies promulgated by the PRC central government that impose inspection requirements for marketplace lending platforms, local governments accelerated their inspections of online lending platforms and began to publish the results.  If a marketplace lending platform does not pass its inspection, it must cease its operations.  We notified national and local regulators in April 2019 that we decided to exit the marketplace lending platform business and transit into the business of facilitating institutional lending capital.  Following such notification, we ceased to be subject to the purview of local rectification offices and the local regulators stopped tracking and monitoring our rectification measures. However, the regulators are developing new measurements for the legacy marketplace lending platforms that are exiting the operation.

Some local governments have found that all marketplace lending platforms in their jurisdiction have failed the inspection. In November 2019, PRC regulatory authorities indicated that their focus was on facilitating the proper exit of all platforms from the entire marketplace lending industry.

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In response to the unclear and rapidly changing regulatory requirement, we started to wind down our legacy marketplace lending platform business in April 2019 for individual investors, whereby we only focused on serving the remaining borrowers and lenders on our legacy marketplace lending platform, at the same time we keep serving institutional lenders by helping them facilitate loans to the borrowers we solicited.  See “Item 4. Information on the Company—B. Business Overview—Legacy Marketplace Lending Platform and Our Transition.”

There are compliance risks in facilitating the institutional lending capital business with the compliance risk of increasingly strict data security regulations a major one. In addition, according to the latest regulatory requirements, entities involved in facilitating institutional lending capital business shall not provide financing guarantee services.

The PRC Cybersecurity Law, implemented on June 1, 2017, provides that to collect and use personal information, network operators shall follow the principles of legitimacy, rightfulness and necessity, disclose their rules of data collection and use, clearly express the purposes, means and scope of collecting and using the information, and obtain the consent of the persons whose data is gathered. On December 29, 2017, the National Information Security Standardization Technical Committee officially issued the Information Security Technology Personal Information Security Specification (“Specification”), which provides the principles and security requirements to be followed in the collection, preservation, use, sharing, transfer, public disclosure and other personal information processing activities.  The Specification was updated on March 6, 2020, and will be officially implemented from October 1, 2020. The updated Specification adds compliance requirements for the collection, storage, sharing, and transfer of personal biometric information. The updated Specification sets forth higher compliance requirements for the information platform to connect to third party management and other aspects of the information platform. On May 28, 2019, the Cyberspace Administration of China, together with relevant departments, drafted the Data Security Management Measures (draft for comments), which reiterated and emphasized the three aspects of data collection. In addition, illegal access to personal information, unauthorized access to data and other acts have been criminalized. As the business of facilitating institutional lending capital involves the collection and application of a large amount of data, increasingly strict regulatory policies in the data industry may make compliance in the operation of our business of facilitating institutional lending capital more difficult and will likely increase compliance costs.

Regulations relating to the data industry have become increasingly tightened, and as our business of facilitating institutional lending capital heavily relies on the application of data in daily business operations, data compliance risks exists and may negatively impact our new business.

The risk control services that we intend to offer in connection with our facilitating institutional lending capital may be prohibited by certain regulations, and therefore our new business of facilitating the institutional lending capital may be negatively impacted.

On December 1, 2017, 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 of the Regulation and Rectification of the “Cash Loan” Business (Circular No. 141). Circular No. 141 provides that banking financial institutions shall not outsource the core business of risk control to a third party institution. However, in practice, because many financial institutions do not have online risk control capabilities, they outsource part of risk control to companies facilitating institutional lending capital as a precondition for cooperation. The platform has strong risk control ability due to its previous credit analytic business experience and expertise. However, considering the above provisions, when engaging in facilitating institutional lending capital, the platform may not provide risk control services to financial institutions in compliance with Circular No. 141, thus affecting the development of the business of facilitating institutional lending capital.

In November 2018, Chinese Banking and Insurance Regulatory Commission (CBIRC) officially released the Measures for The Administration of Online Loans for Commercial Banks (Draft). The draft measures require institutions which help commercial banks to facilitate loans should provide sufficient customer information, and the bank must be responsible for credit risk control and underwriting credit independently.  The draft measures also emphasized risk-control, credit evaluation and other core banking service cannot be outsourced.

On December 19, 2018, the PRC government issued the Opinions on Classified Disposal and Risk Prevention of Online Lending Intermediaries (Circular No. 175). These opinions require "actively guide part of online lending platform companies transferring to the online micro-credit companies,  facilitating lending capital for institution lenders, or licensed asset management institutions".

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In August 2019, the General Office of the State Council issued a guidelines on Promoting the Legal Norms and Healthy Development Of Platform Economy. The guidelines specifically pointed out that setting up financial institutions, engaging in financial activities, providing financial information intermediaries and dealing marketing services must be subject to market entry criteria in accordance with the law.  However, the guidelines did not specify the detailed criteria of the market entry of facilitating institutional lending capital business.

In September 2019, the Zhejiang Banking and Insurance Regulatory Bureau issued “Notice on Further Regulating Issues Related to Personal Consumption Loans (Circular No. 213 [2019])”. The Notice imposed some restrictions on personal consumption loans, one of which was "no outsourcing of core business such as credit check and risk control."

In October 2019, the Beijing Banking and Insurance Regulatory Bureau issued a Notice on Regulating Cooperation Business between Banks and Fintech Companies and Internet Insurance Companies. The Notice emphasized that the lending facilitation institutions with various qualifications may cause risks of incompliance, default, moral hazard and information mismanagement.

On January 20, 2020, CBIRC completed the second round of soliciting opinions concerning "Measures for The Administration of Online Loans for Commercial Banks (Exposure Draft)", which was first commented in 2018.  In the sent exposure draft, The measure subdivide a cooperation area between commercial banks and Fintech companies that the companies that provide the service of either customer acquisition, facilitating loans, risk sharing, information technology, overdue collection are defined as business partners to financial institutions including but not limit to banking, insurance companies, financing guarantee companies, e-commerce companies, big data and information technology companies, and collection companies. The measure basically covers all related areas of consumption finance industry. A higher threshold of cooperation between commercial banks and partners is required to set based on the measure’s requests. The Exposure Draft also highlighted if the Internet loan business model involves cooperation with external institutions, the core risk control step shall be independently carried out by commercial Banks, and the cooperative institutions shall not charge the borrowers interest fees in any form. The commercial bank shall not accept the risk guarantee commitment of the cooperative institution, nor shall it accept the credit enhancement service provided by the unsecured cooperative institution. This Draft if adopted as it is will lead to the phrasing out of some bundling, disguised guarantees and some existing models of co-operation, and Banks' appetite for risk may be reduced.

On October 23, 2019, China Banking and Insurance Regulatory Commission issued the Notice on Printing and Distributing the Supplementary Provisions on the Supervision and Management of Financing Guarantee Companies, which clearly provided that institutions providing customer promotion, credit evaluation and other services for various lending institutions shall not provide financing guarantee services without approval. This regulation did not specifically address facilitating institutional lending capital business, but the regulators could have new regulations regarding the business of facilitating institutional lending capital.

The Supreme People's court, the Supreme People's Procuratorate, the Ministry of Public Security and the Ministry of Justice issued the Notice on Several Issues Concerning the Handling of Criminal Cases of Illegal Lending, which came into force on October 21, 2019. According to this Notice, after the platform has been transformed into business of facilitating institutional lending capital, if (1) various fees, including interests, penalties and service fees charged in total would render the borrower's comprehensive cost calculated on an annualized interest rate basis in total to exceed 36%, (2) the financial institutions have operations out of the business scope licensed by regulatory authorities, and (3) other conditions of the Notice are met, there is a risk that we will be prosecuted for illegal business operations.

We are currently not in full compliance with the New York Stock Exchange’s continued listing criteria, and may be delisted.

As set forth in our prior press releases, we are currently not in full compliance with the New York Stock Exchange’s continued listing standards, such as the minimum market capitalization. The New York Stock Exchange has granted us an additional period through December 5, 2020 to address the market capitalization issue, subject to quarterly interim reporting by us to the New York Stock Exchange on progress relating to a business transformation plan that we submitted to the Exchange. In addition, if our average market capitalization falls below US$15 million in any 30-day period or if our ADS price falls below US$0.16 at any point, we may be subject to immediate delisting.  If we are delisted, the liquidity of our ADSs may be significantly adversely affected.

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Our legacy marketplace lending platform’s business of connecting investors and borrowers constituted an intermediary service, and our contracts with investors and borrowers were 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 facilitation of an intermediation contract, which results in harm to the client’s interests may not claim any fee for its intermediary services and is liable for any damage incurred by the investor. Although we stopped the legacy marketplace lending business in April 2019, with the purpose to help remained individual investors on our legacy marketplace lending platform to collect their principal from borrowers, we provide a post-loan management service to them. However, both a tightened supervision of aggressive collection includes Chinese Crime Crackdown plan and some force majeure risks such as the outbreak of novel coronavirus in China have a material and adverse effect on our ability to collect past-due payments from delinquent borrowers. If our ability to collect past—due payments from delinquent borrowers is impaired, the remained individual investors’ confidence will be damaged and may push local government involved in with irrational behavior, our business license of the corporate body in China will be revoked and we might be suspected illegal absorbsion of public deposits.

Although we are constantly working to connect to the Credit Reference System of the People's Bank of China to put more pressure on the delinquent borrowers and speed up the collection, but so far this effort has not been successful. And even if the effort succeeds, it is not clear how much it will help our collection efforts.

Our payment management services with respect to our legacy marketplace lending platform may not be as effective in the future, and may need to be modified to comply with future PRC laws and regulations regarding the debt collection industry in China.

In 2000, the State Economic and Trade Commission, the Ministry of Public Security and the State Administration of Industry and Commerce issued the Notice on Prohibition of All Types of Debt Collection Companies and Raids on Illegal Debt Collection Activities (GuoJingMaoZong He (2000) 568), or the Notice on Prohibition, which regulates the activities on debt collection companies, including the prohibition on the use of threats, intimidation, harassment or disclosure of private information in collection efforts.  While we believe that our payment management services team, which engages in collection efforts primarily by means of phone calls and text messages, has complied with the Notice on Prohibition, we may need to modify our payment management services in the future to comply with changes to debt collection regulations. If our collection methods are viewed by borrowers or regulatory authorities as harassments, threats, or criminal conduct, we may be subject to lawsuits initiated by borrowers or prohibited by the regulatory authorities from using certain collection methods. In addition, our existing collection methods, such as phone calls and text messages, may not be as effective in the future. If any of these were to happen and we fail to adopt alternative collection methods in a timely manner, or if the alternative collection methods are less effective, our ability in collecting delinquent loans may be impaired.

Regulatory authorities have begun focusing their regulatory efforts on collection operations, which has had a material and adverse effect on our ability to collect past-due payments from delinquent borrowers.

Regulatory authorities have focused their efforts on curtailing illegal activities and strengthening the implementation of rigid collection policies and regulations. These newly implemented collection policies and regulations have required us to modify our collection operations of past-due funds from delinquent borrowers. We believe our collection operations have followed the rigid collection policies and regulations. In addition, our collection operations have been stymied by delinquent borrowers fraudulently reporting illegal collection activities. These fraudulent reports have resulted in delays and increased expenses in collecting past-due funds from delinquent borrowers.

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The increasing regulatory and restriction requirements of the regulatory authorities on lending collection will have a negative impact on the normal collection from the platform to the borrower and promote the trend of malicious default of the borrower.

On December 1, 2017, 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 of the Regulation and Rectification of the “Cash Loan” Business. The Notice provides that all kinds of institutions or entrusted third-party institutions shall not collect loans by means of violence, intimidation, insult, slander, harassment, etc. On May 4, 2018, China Banking Regulatory Commission, the Ministry of Public Security, the State Administration for Market Regulation, and the People's Bank of China issued Notice of Regulating Private Lending and Maintaining the Economic and Financial Order. The Notice emphasized the cracking down of collecting loans by intentional injury, illegal detention, insult, intimidation, threat, harassment and other illegal means. On July 23, 2019, the Supreme People's Court, the Supreme People's Procuratorate, the Ministry of Public Security and the Ministry of Justice issued the Opinions on Several Issues in Handling Criminal Cases of Illegal Lending, which reiterated and emphasized the requirements above. The continuous introduction of regulations on collection practices indicates that the regulatory authorities are increasingly strict in the regulation and restriction of loan collection. The increase of restrictions may have a potential adverse impact on the normal collection from the platform to the borrower and increase the collection cost of the platform. In addition, we expect that this will contribute to the trend of borrowers' malicious default and increase the difficulty of the platform’s collection efforts. We might not be able to carry all of our operating losses forward.

Dissatisfied investors could file complaints with the PRC government, which may result in litigation or require us to modify our operations in a ways that ensure payback of the invested principal and increase the predictability of returns to investors on our marketplace.  

According to the Interim Measures for the Administration of the Business Activities of Online Lending Information Intermediary Institutions, online lending platforms are defined as information intermediary institutions, and strictly from the legal perspective, the platform itself is not expected to bear legal liability of the borrower’s breach. However, we cannot rule out the possibility that investors who fail to be repaid due to the breach of borrowers would sue the platform or report to the public security authority. If such things were to happen, the platform would have to be engaged in expensive and time-consuming litigations or criminal investigation procedures, which also would damage the reputation of the platform.

Although investors on marketplace lending platforms generally receive higher returns as compared to depositing their funds with traditional banks, investors may file complaints with the PRC government or reach out to the PRC government to require marketplace lenders to payback principal they invested, and request that the interest and principle payments are returned even if credit losses take place.  To the extent that there are complaints filed against our company, we could be forced to process the complaints and participate in costly and time consuming processes to mitigate losses, which could divert management attention. In addition, to the extent that the PRC government decides to take added measures on these investors’ behalves, we may be required to alter our operations so as to ensure that the rate of return and assurance that investors will receive payment in respect to their investments on our legacy marketplace lending platform.

Regulatory authorities will impose increasingly high regulatory requirements on microfinance companies, which will have an adverse impact on the operations of our subsidiaries.

According to the statement of the local financial supervision department, microfinance companies belong to non-monetary banking services financial industry enterprises, which rely on their capital to issue loans and cannot absorb public deposits. According to the latest legislative plan currently announced, regulations on non-deposit lending organizations will be introduced soon. The regulations intend to make clear provisions on market access, operating rules, debt collection rules, and supervision and management measures of microfinance companies. When the regulations are formally promulgated, our microfinance company will be at risk of not meeting the relevant regulatory requirements, thus lose its license to operate.

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Transitioning from the legacy marketplace lending platform business, into a business of facilitating institutional lending capital

We have obligations to verify information relating to borrowers and detecting fraud. If we fail to perform such obligations to meet the requirements of relevant laws and regulations, we may not be able to collect the payment from borrowers and institutional lenders will not keep working with us.

In our transition, we facilitate financial institutional lending capital for our borrowers. If we intentionally conceal any material information or provides false information in serving our institutional lender clients, we will be contractually liable for any damages incurred by the clients. Therefore, if we fail to provide material information to investors and are found to be at fault, for failure to exercise proper care, or failure to conduct adequate information verification or supervision, we could be subject to liabilities as an intermediary under the PRC Contract Law. In addition, the Interim Measures have imposed additional obligations on online lending information intermediaries to verify the truthfulness of the information provided by or in relation to loan applicants and to actively detect fraud. As the Interim Measures are relatively new, it is still unclear to what extent online lending information intermediaries should exercise the duty of care in detecting fraud. In addition, if there are fraudulent activities involved, we may not be able to collect the payment from the fraudulent borrowers. Although we believe that, as an information intermediary, we should not bear the credit risk for investors as long as we take reasonable measures to detect fraudulent behaviors, we cannot assure you that we would not be subject to any liabilities under the Interim Measures if we fail to detect any fraudulent behavior. If that were to occur, our results of operations and financial condition could be materially and adversely affected.

Some aspects of our business operations might not be in full compliance with existing and future requirements set forth by the CBIRC or laws or regulations promulgated by other PRC authorities regulating the facilitating institutional lending capital business.

In July 2015, ten PRC central government ministries and regulators, including the PBOC, the CBIRC, the Ministry of Finance, the Ministry of Public Security and the Cyberspace Administration of China, together released the Guidelines, which identified the CBIRC as the supervisory regulator for the online lending industry.  According to the Guidelines, online lending platforms may only serve as intermediaries to provide information services to borrowers and investors, and may not provide credit enhancement services or illegally conduct fundraising.  The Guidelines also outlined certain regulatory propositions, which would require Internet finance companies, including online lending platforms, to (i) use banking financial institutions’ depository accounts to hold lending capital, and engage an independent auditor to audit such accounts and publish audit results to customers; (ii) improve the disclosure of operational and financial information, provide sufficient risk disclosure, and set up thresholds for qualified investors to provide better protections to investors; (iii) enhance online security management to protect customers’ personal and transactional information; and (iv) take measures against anti-money laundering and other financial crimes.

In August 2016, the CBIRC and other regulators collectively announced the publication of the Interim Measures. The Interim Measures provide for a twelve-month transition period, although in practice, regulators have extended the period by which online lending intermediaries shall have rectified their non-compliance.  Apart from what had already been emphasized in the Guidelines and other previously released principles, the Interim Measures also include:  (i) general principles; (ii) filing administration; (iii) business rules and risk management guidelines; (iv) protection measures for investors and borrowers; (v) rules on information disclosure; (vi) supervision and administrative mechanisms; and (vii) legal liabilities.  See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to the Online Lending Industry.”

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In November 2016, the CBIRC, the MIIT and the State Administration of Industry and Commerce, jointly issued the Guidance of Administration, which provides the general filing rules for online lending intermediaries and delegates the filing authority to the local financial authorities.  See “Item 4. Information on the Company— B. Business Overview—Regulation—Regulations Related to the Online Lending Industry.”  Since 2017, local financial regulators have been conducting investigations on the online lending intermediaries, and if we failed to be in full compliance with any regulations, we may be required to rectify mistakes within a certain period as stipulated in the rectification order of local financial regulators.  After submitting the filing application, local regulators will conduct comprehensive investigations and inspections of us. Upon completion of their investigations and inspections, satisfaction with our compliance or rectifications is one of the conditions for online lending intermediary filing.  In addition, Circular 141 and Circular 57 specified requirements for online lending intermediaries.

In February 2017, the CBIRC released the Guidance to regulate funds depositories for online lending intermediaries, which defines several obligations and responsibilities of online lending intermediaries and commercial banks involved in the online funds depository business.  See “Item 4. Information on the Company— B. Business Overview—Regulation—Regulations Related to the Online Lending Industry.”  To the extent our current arrangements with commercial banks are deemed to be not-compliant with any of the Guidance’s requirements, we may need to adjust our operations, and as a result, our business may be materially and adversely impacted. See “—Risks Related to Our Business and Industry—If we are unable to maintain relationships with our third-party service providers, our business will suffer.”

In April 2017, the Office of the Leading Group on Special Rectification of Risks in Online Lending, or the National Rectification Office, which is the nationwide regulator for the administration and supervision of Internet finance and online lending, issued a Notice on the Conduct of Check and Rectification of Cash Loan Business Activities and a supplementary notice, or the Notice on Cash Loan.  The Notice on Cash Loan prohibits online lending intermediaries from conducting cash loan businesses with the following features:  conducting maliciously fraudulent activities, offering loans with extortionate interest rates or using violence in loan collections.  Our consumption loan business did not have any of the prohibited features set forth in the Notice on Cash Loan.  However, the Notice on Cash Loan and other relevant regulations have not explicitly stipulated the definition of cash loan, and the interpretation and application of laws and regulations promulgated in the Notice on Cash Loan is not entirely clear.  If changes to our  consumption loan business, which we are winding down, are required for us to comply with any future rules or regulations, a material change to our service to exiting borrowers including collection operation might take place, which could have adversely impacted on our legacy marketplace lending platform business.  

In December 2017, the Office of the Leading Group on Special Rectification of Risks in Internet Finance and the National Rectification Office jointly released Circular 141, and the National Rectification Office released Circular 57. Circular 141 and Circular 57 specified requirements for online lending intermediaries. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to the Online Lending Industry.”   Beginning in 2017, local financial regulators started conducting onsite inspections of online lending intermediaries, including us, and issued notices to rectify certain practices.  Following these onsite inspections, the local financial regulator issued a Notice of Special Rectification regarding Internet Finance in July 2017, or the Notice, which requires us to modify certain aspects of our operations.  The Notice requires us to: (i) ensure that its services and business are compliant with the Interim Measures; (ii) make further adjustments in accordance with the Guidance; and (iii) ensure that each lender and borrower has entered into a one-to-one electronic loan agreement on our online lending platform.  In response requests from and communications with local financial regulators, we have taken several remediation measures.  

In addition, some other elements of our marketplace may not currently be operating in full compliance with the Guidelines, the Interim Measures, the Guidance, Circular 141, Circular 57 and the other principles that have been announced in recent years.  For example, the Interim Measures provide upper limits on the loan balance of a single borrower.  While our legacy business mainly involves lending small amounts to a large number of borrowers, we still may not be in full compliance with the upper limits set forth in the Interim Measures because we may need to rely on the information provided by borrowers to determine whether their lending amounts from all intermediaries have reached the upper limits, and the information they provide us may contain misrepresentations or omissions or otherwise be unreliable. Moreover, the Interim Measures require online lending intermediaries to file with the local financial regulators and to include serving as an Internet lending intermediary in their business scope. In addition, the Interim Measures stipulate that online lending intermediaries shall not operate businesses other than risk

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management and necessary business processes such as information collection and confirmation, post-loan tracking and pledge management in accordance with online-lending regulations, via offline physical locations.  However, the Interim Measures do not clearly set forth the types of business process that are not permitted to operate through offline physical locations.  We have a network of offline facilities including three investor service centers, which focuses on maintaining relationship with investors in the process of exiting the legacy platform business.  We may be requested to make further changes to serve the existing investors in these offline facilities.

Furthermore, the Interim Measures proposed requirements including with respect to certain prohibited activities, risk disclosure, borrower information disclosure and online dispute resolution, examination and verification functions, anti-fraud measures, risk education and training, information reporting, anti-money laundering, anti-terrorist financing, systems, facilities and technologies, service fees, electronic signatures, loan management, risk assessment, auditing and authentication, reporting obligations and information security. To the extent that our business is deemed to be non-compliant with any of these requirements of the Interim Measures, we may need to make necessary adjustments to comply and, as a result, our legacy business in the exiting process may be materially and adversely affected.  We are waiting for further regulatory instructions given we are exiting from the industry.

The regulatory framework and the governmental policies for the online lending industry in China is evolving and is likely to remain uncertain for the foreseeable future.  In this evolving regulatory environment, PRC regulators may from time to time impose long-term or temporary requirements on online lending intermediaries.  For example, the Shanghai local association announced a measure prohibiting online lending intermediaries from increasing their business scale, number of borrowers and lenders.  In addition, future regulatory requirements may be more difficult or costly for us to comply with and could materially and adversely affect the exiting of our legacy business.

For a further description of the laws and regulations applicable to us, see “Item 4. Information on the Company— B. Business Overview—Regulation.”

Our facilitation of financial institution lending capital to our borrowers may be deemed to be the provision of an intermediary service, and our agreements with these financial institutions may be deemed to be intermediation contracts under the PRC Contract Law.

Our business of facilitating financial institutional lending capital to our borrowers may be deemed to be the provision of an intermediary service, and such services may be deemed to be as intermediation contracts under the PRC Contract Law. Under the PRC Contract Law, an intermediary may not receive service fees and may be subject to damages if it intentionally conceals any material fact or provides false information in connection with an intermediation contract that harms the client’s interests.  See “Regulations Related to the Marketplace Lending Industry.”  If we fail to provide material information to financial institutions or if we fail to identify false information received from borrowers and provide such information to financial institutions, we could be held liable for damages under the PRC Contract Law. In addition, if we fail to honor our obligations under our agreements entered into with financial institutions, we can be held liable for damages under the PRC Contract Law.

The personal data and other confidential information of customers and partners that we collect or are provided access to may subject us to liabilities imposed by relevant governmental regulations or expose us to risks of cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions.

We receive, transmit and store a large volume of personally identifiable information and other confidential data from borrowers, investors and our partners.  There are numerous laws regarding privacy and the storing, sharing, use, disclosure and protection of personally identifiable information and user data.  Specifically, personally identifiable and other confidential information is increasingly subject to legislation and regulations in numerous domestic and international jurisdictions, the intent of which is to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction.  This regulatory framework for privacy issues in China and worldwide is currently evolving and is likely to remain uncertain for the foreseeable future.  In addition, there may be limits on the cross-border transmission of user data even to the extent that such transmission is within our company.  We could be adversely affected if legislation or regulations are expanded to require changes in business practices or privacy policies, or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, financial condition and results of operations.  In addition to laws, regulations and other applicable rules regarding privacy and privacy advocacy, industry groups or other private parties may propose new and different privacy standards.  Because the interpretation and application of privacy and

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data protection laws and privacy standards are still uncertain, it is possible that these laws or privacy standards may be interpreted and applied in a manner that is inconsistent with our practices.  Any inability to adequately address privacy concerns, even if unfounded, or to comply with applicable privacy or data protection laws, regulations and privacy standards, could result in additional cost and liability for us, damage our reputation, inhibit the use of our platform and harm our business.

In addition, the data we possess and the automated nature of our online business may make us an attractive target for and potentially vulnerable to, cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions.  Furthermore, some of the data we possess is stored on our servers, which are hosted by third parties.  While we and our third-party hosting facilities have taken steps to protect confidential information to which we have access, our security measures may be breached in the future.  Any accidental or willful security breaches or other unauthorized access to our marketplace could cause confidential borrower, investor and partner information to be stolen and used for criminal purposes.  Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity.  If our security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, our relationships with borrowers, investors and partners could be severely damaged, and we could incur significant liability.  

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 and our third-party hosting facilities may be unable to anticipate these techniques or implement adequate preventative measures.  In addition, the Administrative Measures for the Security of the International Network of Computer Information Network, effective on December 30, 1997 and amended on January 8, 2011, requires us to report any data or security breaches to the local offices of the PRC Ministry of Public Security within 24 hours of any such breach.  In addition, the Cyber Security Law of the PRC, issued in June 2017, requires us to take immediate remedial measures when we discover that our products or services are subject to risks, such as security defects or bugs. Such remedial measures include informing our borrowers and investors of the specific risks and reporting such risks to the relevant competent departments. Any security breach, whether actual or perceived, would harm our reputation, and could cause us to lose borrowers, investors and partners and adversely affect our business and results of operations.

We also face indirect technology and cybersecurity risks relating to our business partners, including our third-party service providers which manage the transfer of borrower and investor funds and our custodian bank which provides custodian services for our borrowers’ and investors’ funds. As a result of increasing consolidation and interdependence of computer systems, a technology failure, cyber-attack or other information or security breach that significantly compromises the systems of one entity could have a material impact on its business partners. Any cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions of such third-party payment service providers and custodian bank could, among other things, adversely affect our ability to serve our borrowers and investors, and could even result in misappropriation of funds of our borrowers and investors. If that were to occur, our third-party service providers, custodian bank and us could be held liable to borrowers and investors who suffer losses from the misappropriation.

We may be held liable for information or content displayed on, retrieved from or linked to our website or mobile apps for our legacy marketplace lending platform, which may materially and adversely affect our business and operating results.

The PRC government has adopted regulations governing internet access and distribution of information over the internet. Under these regulations, internet content providers and internet publishers are prohibited from posting on the internet content that, violates PRC laws and regulations, impairs the national dignity of China, contains terrorism, extremism, content of force or brutality, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide internet content and other licenses, the closure of the concerned websites and criminal liabilities. In the past, failure to comply with these requirements has resulted in the closure of certain websites. The website operator may also be held liable for the censored information displayed on or linked to the website.  

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In particular, the Ministry of Industry and Information Technology, or the MIIT, has published regulations that place website operators with liability for content displayed on their websites and actions of users of their systems that are deemed to be socially destabilizing. The Ministry of Public Security has the authority to order any local internet service provider to block any internet website at its sole discretion. From time to time, the Ministry of Public Security has stopped the dissemination over the internet of information which it believes to be socially destabilizing. The State Secrecy Bureau is also authorized to block any website it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of state secrets. Furthermore, we are required to report any suspicious content to relevant governmental authorities, and to undergo computer security inspections. If we fail to implement the relevant safeguards against security breaches, our websites may be shut down and our business license may be revoked.

In addition to our website, we also facilitating financial institutional lending capital through our mobile apps, which are regulated by the Regulations for Administration on Mobile Internet Applications Information Services, or the MIAIS Regulations, promulgated by the Cyberspace Administration of China, or the CAC, in June 2016 and became effective in August 2016. According to the MIAIS Regulations, the providers of mobile apps shall not create, copy, publish or distribute information and content that is prohibited by laws and regulations. We have implemented internal control procedures screening the information and content on our mobile apps to ensure their compliance with the MIAIS Regulations. However, we cannot assure that all the information or content displayed on, retrieved from or linked to our mobile apps for our facilitating financial institutional lending capital complies with the requirements of the MIAIS Regulations at all times. If our mobile apps for our facilitating financial institutional lending capital were found to be violating the MIAIS Regulations, we may be subject to administrative penalties, including warning, service suspension or removal of our mobile apps from the relevant app stores, which may materially and adversely affect our business and operating results.

We have incurred net losses in the past, and may incur them in the future.

We have incurred net losses in the past. In the process of transitioning from the legacy marketplace lending platform business, into a business of facilitating institutional lending capital, we anticipate that our operating expenses will increase in the foreseeable future as we seek to continue to improve, further enhance and optimize our new business. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenues sufficiently to offset these higher expenses.  We may incur net losses and may be unable to achieve or maintain profitability on a quarterly or annual basis for the foreseeable future.

Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.

Our quarterly results of operations, including our operating revenue, expenses, key performance metrics, may vary significantly in the future as we are transitioning from the legacy marketplace lending platform to the business of facilitating institutional lending capital, and period-to-period comparisons of our operating results may not be meaningful.  Accordingly, the results for any one quarter are not necessarily an indication of future performance.  Our quarterly financial results may fluctuate due to a variety of factors, some of which are outside of our control and, as a result, may not fully reflect the underlying performance of our business. Fluctuation in quarterly results may adversely affect the price of our ADSs.  Factors that may cause fluctuations in our quarterly results include:

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Our transition to facilitate institutional lending capital business may be impacted by adverse economic and market conditions.

Many factors, including factors that are beyond our control, may have a detrimental impact on borrowers’ willingness to seek loans and investors’ ability and desire to lend, and consequentially have a negative effect on our business and results of operations. These factors include general economic conditions, the general interest rate environment, unemployment rates, residential home values and the availability of other investment opportunities and force majeure risks, such as recent outbreak of novel coronavirus epidemic. If any of these factors arise, our revenue and transactions on our third party service provider for financial institutions would decline and our business would be negatively impacted. For example, the fluctuation of interest rates may affect the demand for facilitate institutional lending capital business, a decrease in interest rates may cause potential borrowers to seek lower-priced loans from other channels and a high interest rate environment may lead to an increase in competing investment options and dampen investors’ desire to invest on our online. As a result, fluctuations in the interest rate environment may discourage institution investors and borrowers from participating on our online, which may adversely affect our facilitate institutional lending capital business.

In addition, our business is subject to the credit cycle associated with the volatility of the general economy. If economic conditions deteriorate, we may face increased risk of default, which will result in lower returns or losses to investors. In the event that the creditworthiness of our borrowers deteriorates or we cannot track the deterioration of their creditworthiness, the criteria we use for the analysis of borrower credit profiles may be rendered inaccurate, rendering our risk management system ineffective. This in turn may lead to higher default rates and adverse impact on our reputation, business, results of operations and financial position.

There can be no assurance that economic conditions will remain favorable for facilitate institutional lending capital business. Reduced demand for, or increase in the default rate of, our loans would negatively impact our growth and revenue. If an insufficient number of qualified individuals apply for or insufficient institution capital to facilitate loans through our proprietary decisioning technology, including predictive selection technology, and automated decision technology, our transition to facilitate institutional lending capital business is not as good as we expected.

If the total addressable facilitate institutional lending capital business market is smaller than we believe it is, our revenue may be adversely affected and our business may suffer.  

It is very difficult to estimate the total addressable market for facilitate institutional lending capital by our proprietary decisioning technology, including predictive selection technology, and automated decision technology due to factors such as market demand, PRC regulations of the credit industry, competition, general economic conditions and the relatively short history of the online lending industry in China. We believe that our total addressable market of borrowers consists of prospective borrowers seeking unsecured affordable credit up to RMB200,000 (approximately US$28,169) is sufficiently large.  However, if there is less demand than we anticipate for the loans facilitated through our proprietary decisioning technology, it would significantly and negatively impact our business, financial condition and results of operations.

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Any significant disruption in service on our, our third-party service providers’ or our partners’ computer systems, including events beyond our control, could prevent or delay the processing or posting of payments on loans, reduce the attractiveness of our business.    

A significant natural disaster, such as a fire, power outage, flood or other catastrophic event, or interruptions by strikes, terrorism or other man-made problems, could have a material adverse effect on our business, operating results and financial condition. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our data centers, data verification centers, investor service centers or the data centers of our third-party service providers or our partners could result in lengthy interruptions in our services. In addition, acts of strikes, terrorism and other geo-political unrest or hacking could cause disruptions in our business and lead to interruptions, delays or loss of critical data. Our operations also rely on the performance of the Internet infrastructure and fixed telecommunication networks in China. All of the aforementioned risks may be further increased if our disaster recovery plans prove to be inadequate. Although this program is functional, we do not currently serve network traffic equally from each data center. If our primary data center shuts down, there will be a period of time that our services, will remain inaccessible to the borrowers and institutional investors.

In the event of an outage or physical data loss on our online or the systems of our third-party service provider depositing or transferring funds on, or third-party payment channels for, our online or partners, such third-party service provider’s or our partners’ ability to cooperate with us could be materially and adversely affected. The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, customer service, reputation and our ability to attract new and retain existing borrowers and investors to our online. Much of our system hardware is hosted in facilities located in Shanghai and Shenzhen that are partially owned by us and operated by our third-party vendors. Our operations depend on such vendors’ ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events. If there is a lapse of service or damage to our system hardware, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities.

Any interruptions or delays in our service, whether as a result of third-party error, our error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with borrowers and investors on our online and our reputation.  Additionally, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur.  We do not currently maintain business interruption insurance to compensate us for potentially significant losses, including potential harm to our business that may result from interruptions in our ability to facilitate the loan products and services. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage. These factors could prevent us from processing or posting payments on the loans, damage our brand and reputation, divert our employees’ attention, subject us to liability and cause borrowers and investors to abandon our online, any of which could adversely affect our business, financial condition and results of operations.

Our business and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.  

Our business and internal systems rely on software licensed from third parties that is highly technical and complex. To the extent that such third parties also license the software or parts of the software, we rely on such third parties to maintain their licensing rights. In addition, our business and internal systems depend on the ability of such software to store, retrieve, process and manage immense amounts of data.  The software on which we rely has contained, and may now or in the future contain, undetected errors or bugs.  Some errors may only be discovered after the code has been used in our operations. Errors or other design defects within the software on which we rely may result in a negative experience for borrowers and investors, delay introductions of new features or enhancements, result in errors or compromise our ability to protect borrower or investor data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of borrowers or investors or liability for damages, any of which could adversely affect our business and financial results.

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Misconduct and errors by our employees and third-party service providers could harm our business and reputation.  

We are exposed to many types of operational risks, including the risk of misconduct and errors by our employees and third-party service providers. Our business depends on our employees and third-party service providers to process a large number of increasingly complex transactions, including loan transactions that involve the use and disclosure of personal and business information. We could be materially adversely affected if personal and business information was disclosed to unintended recipients or an operational breakdown or failure in the processing of other transactions occurred, whether as a result of human error, a purposeful sabotage or a fraudulent manipulation of our operations or systems.  

In addition, the manner in which we store and use certain personal information and interact with borrowers and investors is governed by various laws.  If any of our employees or third-party service providers take, convert or misuse funds, documents or data or fail to follow protocol when interacting with borrowers and investors, we could be liable for damages and subject to regulatory actions and penalties or suffer reputational damage.  We could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or criminal liability or suffer reputational damage.  It is not always possible to identify and deter misconduct or errors by employees or third-party service providers, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses. Furthermore, though we have formulated policies and procedures aimed at preventing money laundering and terrorism financing, we cannot assure you that these policies and procedures will be effective to prevent our employees from engaging in money laundering or terrorism financing activities. In addition, third-party service providers are required to have in place appropriate anti-money laundering policies and procedures under applicable anti-money laundering laws and regulations issued by the PBOC. If any of our third-party service providers fails to comply with the applicable anti-money laundering laws and regulations, our reputation could suffer and we could become subject to regulatory intervention.

Also, we could be materially adversely affected if our employees or third-party service providers absconded with our proprietary data or used our know-how to compete with us.  Although employees have left our company in the past and violated the non-compete and non-solicitation clauses in their employment agreements with little impact on our business, future violations of these clauses could have a material adverse effect on our business. Any of these occurrences could result in our diminished ability to operate our business, potential liability to borrowers and investors, inability to attract future borrowers and investors, reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results of operations.

Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees needed to support our business, particularly in our transition to new business directions.

As we continue to transit into business of facilitating institutional lending capital, we don’t match borrowers with retail investors any more. We keep using our proprietary decisioning technology, including predictive selection technology, and automated decision technology, to act as a third party service provider for financial institutions, to help them facilitate their lending capital to make loans to the borrowers we solicited, for which we evaluate potential borrowers’ creditworthiness, provide analytical screening and marketing services, and also provide portfolio management services, including loan collection services.   We believe our success depends on the efforts and talents of our employees, including software engineers, financial personnel and marketing professionals.  Our future success depends on our continued ability to attract, develop, motivate and retain highly qualified and skilled employees.  Competition for highly skilled sales, technical and financial personnel is extremely intense.  We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure.  Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.

In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them.  If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve borrowers and investors could diminish, resulting in a material adverse effect on our business.

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If we fail to retain our key personnel, we may not be able to successfully complete our transition to our business and our business could suffer.

In addition to attracting and retaining highly skilled employees in general, our future performance depends, in part, on our ability to attract and retain key personnel, including our executive officers, senior management team and other key personnel, all of whom would be difficult to replace.  If one or more of our key executives 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. We may also incur additional expenses to recruit, train and retain qualified personnel.

In particular, Dr. Zhengyu (Zane) Wang, our founder, chairman and chief executive officer, and other senior officers, are critical to the management of our business and operations and the development of our strategic direction.  The loss of the services of Dr. Wang, and our other executive officers or members of our senior management team would likely negatively affect our business, and the process to replace any of them, would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

We may from time to time be subject to claims, controversies, lawsuits and legal proceedings, which could have a material adverse effect on our financial condition, results of operations, cash flows and reputation.  

We may from time to time in the future become subject to or involved in various claims, controversies, lawsuits, and legal proceedings. Lawsuits and litigations may cause us to incur defense costs, utilize a significant portion of our resources and divert management’s attention from our day-to-day operations, any of which could harm our business. Any settlements or judgments against us could have a material adverse impact on our financial condition, results of operations and cash flows. In addition, negative publicity regarding claims or judgments made against us may damage our reputation and may result in material adverse impact on us.

Any failure to protect our own intellectual property rights could impair our brand, negatively impact our business or both.

Our success and ability to compete also depend in part on protecting our own intellectual property.  We rely on a combination of copyright, trade secret, trademark and other rights, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, processes and other intellectual property.  However, it is often difficult to 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. Confidentiality, 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. In addition, the steps we take to protect our intellectual property rights may be inadequate.  Third parties may seek to challenge, invalidate or circumvent our copyright, trade secret, trademark and other rights or applications for any of the foregoing.  In order to protect our intellectual property rights, we may be required to spend significant resources.  Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management.  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 business partners 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 to secure, protect and enforce our intellectual property rights could seriously adversely affect our brand and adversely impact our business.

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We may be sued by third parties for alleged infringement of their proprietary rights, which could harm our business.  

Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry.  From time to time, third parties may claim that we are infringing on their intellectual property rights.  We may, however, be unaware of the intellectual property rights that others may claim cover some or all of our applications, technology or services.  Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, restrict us from conducting our business or require that we comply with other unfavorable terms.  We may also be obligated to indemnify parties or pay substantial settlement costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications or refund fees, which could be costly.  Even if we were to prevail in such a dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management from our business operations.

Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have infringed the intellectual property rights of others, we may be subject to liability for our infringement activities 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.

We may be face liability as a result of delayed payments to third party service providers.  

Due to the impact of regulatory policies and changes in market liquidity in recent years and other regulatory changes, we have endeavored to make timely payments to our vendors.  To the extent we are delinquent in our payment obligations to our vendors, we could face liability for those delinquent payments. As of the date of this report, we are delinquent in our payment obligations to a small portion of our vendors.

Some aspects of our digital operations include open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.  

Some aspects of our digital operations include software covered by open source licenses.  The terms of various open source licenses have not been interpreted by PRC courts and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our online and mobile-based channels.  If portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies if required so by the license, or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our technologies and loan products.  In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of the software.  Many of the risks associated with use of open source software cannot be eliminated, and could adversely affect our business.

If we fail to implement and maintain an effective system of internal controls or fail to adequately remediate prior material weaknesses in our internal control that have been identified, we may be unable to accurately report our results of operations or prevent fraud or fail to meet our reporting obligations, and investor confidence and the market price of our ADSs may be materially and adversely affected.

We are subject to reporting obligations under the U.S. securities laws, including the Sarbanes-Oxley Act of 2002.  Section 404 of this Act requires that we include a report of management on our internal control over financial reporting in this annual report.  In addition, once we cease to be an “emerging growth company,” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting.  Our management may conclude that our internal control over financial reporting is not effective.  Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us.  In addition, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future.  We may be unable to timely complete our evaluation testing and any required remediation.

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Prior to our IPO, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures.  In preparing our consolidated financial statements for the years ended December 31, 2017, we and our predecessor independent registered public accounting firm identified three material weaknesses in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States, or PCAOB, and other control deficiencies.  The three 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, specifically those related to period-end expenses cut-off and accruals; and (iii) inadequate controls with respect to the maintenance of sufficient documentation for, and the evaluation of the accounting implications of, significant and non-routine payment transactions. In preparing our consolidated financial statements for the years ended December 31, 2018, we and our successor independent registered public accounting firm determined these three material weaknesses remain as of December 31, 2018, and identified additional two material weaknesses in our internal control over financial reporting. The additional material weaknesses identified by us and our successor independent registered public accounting firm related to: (iv) a lack of adequate control procedures to ensure compliance with provisions of relevant regulations to prevent the Company from using personal bank accounts for its operation and to manage the usage of bank accounts; and (v) inadequate controls with respect to the maintenance of sufficient documentation for nonrecurring transactions.  Following the identification of the material weaknesses and control deficiencies, we have continuously taken remedial measures.  While we believe that we have remediated some aspects of the material weaknesses identified, the material weakness still existed for the fiscal year ended December 31, 2019.  As a result of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements, errors or omissions.  We cannot be certain in future periods that one or more material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified.  If we fail to maintain the adequacy of our internal controls, including any failure to implement or difficulty in implementing required new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we could incur further remediation costs, we could fail to be able to provide reasonable assurance as to our financial results or the effectiveness of our internal controls or meet our reporting obligations to the SEC and third parties (including lenders under our financing arrangements) on a timely basis and there could be a material adverse effect on the price of our ADSs.

Certain data and information in this annual report were obtained from third-party sources and were not independently verified by us.

This annual report contains certain data and information that we obtained from various government and private entity publications.  Statistical data in these publications also include projections based on a number of assumptions.  The Chinese credit industry, and online lending in particular, may not grow at the rate projected by market data, or at all.  Failure of this industry to grow at the projected rate may have a material adverse effect on our business and the market price of our ADSs.  In addition, the new and rapidly changing nature of the credit and online lending industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our industry.  Furthermore, if any one or more of the assumptions underlying the market data is later found to be incorrect, actual results may differ from the projections based on these assumptions.

We have not independently verified the data and information contained in such third-party publications and reports.  Data and information contained in such third-party publications and reports may be collected using third-party methodologies, which may differ from the data collection methods used by us.  In addition, these industry publications and reports generally indicate that the information contained therein was believed to be reliable, but do not guarantee the accuracy and completeness of such information.

If we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.

We believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates creativity.  As we continue to develop the infrastructure of a public company and grow, we may find it difficult to maintain these valuable aspects of our corporate culture.  Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.

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We do not have any business insurance coverage.

The insurance industry in China is still in an early stage of development, and 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 insuring for 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 our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.

The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.

We are required to obtain a value-added telecommunication business certificate and may be subject to foreign investment restrictions.

PRC regulations impose sanctions for engaging in Internet information services of a commercial nature without having obtained an Internet content provider, or ICP, certificate.  PRC regulations also impose sanctions for engaging in the operation of online data processing and transaction processing without having obtained an online data processing and transaction processing, or ODPTP, certificate (ICP and ODPTP are both sub-sets of value-added telecommunication business certificates).  These sanctions include corrective orders and warnings from the PRC communication administration authority, fines and confiscation of illegal gains and, in the case of significant infringements, the websites involved may be ordered to cease operation.  Nevertheless, the PRC regulatory authorities’ enforcement of such regulations in the context of online lending platforms remains unclear.  The Interim Measures provide that online lending intermediaries must apply for value-added telecommunications business licenses in accordance with the relevant provisions of telecommunications authorities after filing with a local financial regulator.  However, PRC regulatory authorities to date have not explicitly stipulated whether the operator of a online lending platform (including in the form of a website or mobile Internet application) is engaging in Internet information services requiring an ICP certificate or an ODPTP certificate.  If we are not able to obtain the required value-added telecommunication certificates pursuant to the relevant regulations, we may not be able to conduct online lending intermediaries’ services, but it is unclear under these regulations whether online lending intermediaries would be deemed to be engaged in a commercial information provider business or online data processing and transaction processing business or whether an ICP certificate or an ODPTP certificate is required.  To the extent that the PRC regulatory authorities require such value-added telecommunication certificate to be obtained or if they set forth rules that impose additional requirements, and we do not obtain such certificate or comply with such rules, we may be subject to the sanctions described above.  We plan to apply for filing immediately after the filing procedures are clarified by the relevant authorities, and apply for the corresponding value-added telecommunication business certificates after completing the filing, provided that the relevant telecommunication authority clarifies which sub-set of telecommunication business certificates need to be obtained by online lending platforms and how to apply for such certificate.

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According to the Provisions on the Administration of Foreign-invested Telecommunication Enterprises, the ratio of investment by foreign investors to domestic investors in a foreign-invested telecommunication enterprise that engages in the operation of a value-added telecommunication business shall not exceed 50%.  As such, foreign investors are only permitted to invest up to 50% of the registered capital in a foreign-invested telecommunication enterprise that engages in the operation of commercial Internet information services or general online data processing and transaction processing services.  As an exception, the Circular of Ministry of Industry and Information Technology concerning Lifting Restrictions on the Proportion of Foreign Equity in Online Data Processing and Transaction Processing Business (E-commerce), or Circular 196, which was promulgated on June 19, 2015, provides that foreign investors are permitted to invest up to 100% of the registered capital in a foreign-invested telecommunication enterprise engaging in the operation of online data processing and transaction processing (E-commerce).  While Circular 196 permits foreign ownership, in whole or in part, of online data processing and transaction processing businesses (E-commerce), which is a sub-set of value-added telecommunications services, there is still uncertainty regarding whether foreign investment restrictions may be applied to our business and industry.  Further, under either circumstance, the largest foreign investor in an e-commerce business is required to have a satisfactory business track record and operational experience in the value-added telecommunication business.  

We may be subject to risks if we have to restructure as a variable interest entity to obtain a telecommunication business license.

The final version of Foreign Investment Law adopted by the legislature, namely Standing committee of the National People’s Congress in March 2019 is quite different from the Draft Foreign Investment Law and does not address the issues related to the VIE structure. If we are required to establish a variable interest entity, or VIE, to serve as the operator of our online lending platform, the PRC government or local financial regulators may determine that the contractual arrangements necessary to form and control the VIE, or the Contractual Arrangements, do not comply with PRC licensing, registration, policies, legal or regulatory requirements, or with requirements or policies that may be adopted in the future and we could be subject to severe penalties, material difficulties in making the requisite filings or registrations, or be forced to relinquish our interests in certain operations.  Accordingly, we cannot assure you that if any such Contractual Arrangements we may implement were to be challenged in a PRC court that these Contractual Arrangements would be enforced and upheld.  Furthermore, we may be required to conduct our telecommunication certificate-related business in China under Contractual Arrangements and generate our revenues through a VIE.  In such case, we would need to rely on the Contractual Arrangements that we implement for a portion of our PRC operations, which may not be as effective in providing us with control over such operations as we would have with direct ownership of such VIE.  Additionally, any failure by a VIE or its shareholders to perform its and their obligations under the Contractual Arrangements that we implement may have a material adverse effect on our business and our legal remedies under PRC law.  Moreover, the shareholders of a consolidated VIE that we implement may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.  The shareholders of a VIE may breach or refuse to renew the Contractual Arrangements with us that allow us to effectively control such VIE, and receive economic benefits from its operations.  There is a risk that they would not always act in the best interests of our company.  We may not have effective arrangements to address potential conflicts of interest between these individuals and our company.  We would rely on these individuals to abide by the contract laws of China and honor their contracts with us in order for us to effectively control the VIE and to receive the economic benefits deriving from our contracts with them.  If we are unable to resolve any conflicts of interest or disputes between us and the shareholders of a VIE or if the shareholders of the VIE breach our agreements with them, we would have to rely on legal proceedings to enforce our rights, which may result in disruption to our business.  There is also substantial uncertainty as to the outcome of any such legal proceedings.  In addition, Contractual Arrangements in relation to a consolidated VIE may be subject to scrutiny by the PRC tax authorities, which may determine that we or the consolidated VIE owe additional taxes, which could negatively affect our financial condition and the value of your investment.  In the event of bankruptcy, dissolution or liquidation of a VIE, we may lose the ability to use certain assets held by the VIE that are material to our business.

The micro-credit business in which our subsidiary, Haidong CRF Micro-credit Co., Ltd., or Haidong, operates is heavily regulated and any failure by us to adhere to the relevant laws, regulations or measures may have a significant impact on our business, results of operations and financial condition.

The micro-credit business of our subsidiary, Haidong, is heavily regulated by PRC laws and regulations, including requirements in respect of approvals and licensing, maintenance of minimum capital reserves, the maximum interest rates that can be charged, methods of fundraising and the amount permitted to be raised.  In addition, these laws and regulations are subject to change, which may impose significant costs or limitations on the way we conduct or

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expand our business, including the way in which we can charge fees.  There may be uncertainties regarding the interpretation and application of new laws and regulations and other governmental policies.  Moreover, as we develop new loan products, we may be subject to additional laws and regulations.  Any material violation of such laws and regulations, if not remedied, could have an adverse impact on our business, financial condition and results of operations.  To the extent laws and regulations change or we become subject to different laws and regulations, the way in which we operate the micro-credit portion of our business may be materially impacted, and we may not be able to adapt to the new regulatory environment on a timely basis.  Failure to comply with the applicable laws, regulations or measures may result in fines, restrictions on our activities or revocation of our licenses, which could have a significant impact on our micro-credit business.  

Haidong obtained an approval of operation and business license from the relevant authorities in Qinghai Province in 2012, and will apply for the Microfinance Company Business Qualification Certificate pursuant to a new regulation issued in 2014 after the relevant authority in Qinghai Province begins to accept applications from microfinance companies.  We cannot assure you that we will be able to obtain such certificate.  Failure to obtain such certificate may have adverse effect on our micro-credit business.

The Several Opinions Regarding the Promotion of Healthy Development of Micro-credit Lending Companies, issued by the Qinghai Financial Office, require the balance of operating loans with terms less than six months issued by micro-lending companies to comprise at least 70% of the balance of all loans issued by such micro-lending company.  We may need to adjust our business model with respect to the ratio of loans with terms less than six months for Haidong’s operations to be compliant with relevant requirements.  In addition, it is not clear whether Haidong’s facilitation of consumption loans across China through online platforms will be deemed to be a violation of current or future regulations and we may be required to adjust our business model for Haidong’s operations accordingly.

According to the Interim Measures for the Administration of Micro-credit Companies of Qinghai Province issued by the Financial Office of Qinghai Province, as amended, or the Interim Measures of Qinghai Province, the total aggregate shareholding of the largest shareholder and its affiliates in a micro-credit company in Qinghai Province may not exceed 40% of the registered capital of the micro-credit company.  Some other provinces in China do not impose limits on shareholding concentrations of micro-credit companies.  30% of Haidong’s shares are held directly by Shanghai CRF Financial Information Service Co., Ltd., or Shanghai CRF and 70% of Haidong’s shares are held by five individuals as nominees of Shanghai CRF through entrustment agreements.  Pursuant to these entrustment agreements, we are the sole beneficial owner of all of Haidong’s shares and have the ability to exercise all related shareholder’s rights, including the rights to receive distributions and dividends and exercise voting rights.  The relevant local government authority has issued a letter acknowledging its consent to such arrangement.  According to our PRC counsel, Fangda Partners, these entrustment agreements are legal, valid and enforceable.  As also advised by our PRC legal counsel, the local administrative authorities could change their position or impose more stringent requirements in the future, in which case we will make other arrangements to meet relevant requirements.

In addition, Haidong is subject to regulations applicable to micro-credit companies incorporated in Qinghai Province, which are set forth by the Finance Office of Qinghai Province.  These regulations provide that:  (i) if loans use a micro-credit company’s own capital, the interest rate and fees must be greater than 90% of the PBOC benchmark interest rate posted at PBOC official website on daily basis, and less than four times the PBOC benchmark interest rate; and (ii) if loans use capital derived from certain financial institutions, the interest rate and fees must be greater than 90% of the PBOC benchmark interest rate and less than three times the PBOC benchmark interest rate.

The loans originated by Haidong are subject to the aforementioned interest rate and fee restrictions, which could affect our ability to collect the payments from the loans originated by Haidong, and may have a material adverse effect on our business.  

Our ability to continue as a going concern is dependent on our ability to raise capital to support our operations.

We have limited cash resources and will periodically need additional funds to maintain our operations. We expect to consume cash and incur operating losses for the foreseeable future as we are transitioning from the legacy marketplace lending platform business, into a business of facilitating institutional lending capital to our target borrowers. The impact on cash resources and results from operations will vary depending on our ability to successfully make this transition.

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Our financial statements have been prepared on a going concern basis, which contemplates continuity of normal activities and realization of assets and settlement of liabilities in the normal course of business. Our ability to continue as a going concern is dependent upon our ability to derive sufficient cash from investors, from the remaining investors and borrowers on our legacy marketplace lending platform, from our business of facilitating institutional lending capital for target borrowers, and from other sources of revenue. Management has considered the cash flow forecasts and the funding requirements of our business and believes that the strategies in place are appropriate to generate sufficient funding to allow us to continue as a going concern. Accordingly management has prepared the financial statements on a going concern basis. Should the above assumptions not prove to be appropriate, there is material uncertainty whether we will continue as a going concern and therefore whether realize our assets and extinguish our liabilities in the normal course of business and at the amounts stated in our financial statements.

If we are unable to obtain additional funds on favorable terms or at all, we may be required to cease or reduce our operations. Also, if we raise more funds by selling additional securities, the ownership interests of holders of our securities will be diluted.

We may need additional capital, and financing may not be available on terms acceptable to us, or at all.

Although we believe that our current cash and cash equivalents and anticipated cash flows from operating activities will be sufficient to meet our anticipated working capital requirements and capital expenditures in the ordinary course of business for the next 12 months, we may need additional cash resources in the future if we experience changes in business conditions or other developments. We may also need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, capital expenditure or similar actions.  Due to the unpredictable nature of the capital markets and our industry, we cannot assure you that we will be able to raise additional capital on terms favorable to us, or at all, if and when required, especially if we experience disappointing operating results. If adequate capital is not available to us as required, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly limited, which would adversely affect our business, financial condition and results of operations. If we do raise additional funds through the issuance of equity or convertible debt securities, the ownership interests of our shareholders could be significantly diluted. These newly issued securities may have rights, preferences or privileges senior to those of existing shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations.  We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

We may incur substantial debt in the future, which may adversely affect our financial condition and negatively impact our operations.

Although we have not incurred substantial debt to date, we may decide to do so in the future.  The incurrence of debt could have a variety of negative effects, including:

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The occurrence of any of these risks could adversely affect our operations or financial condition.

Changes in foreign exchange regulations may materially adversely affect our results of operations.  

Our marketplace currently receives all of its lending capital from investors in RMB.  The PRC government regulates the conversion between RMB and foreign currencies.  Over the years, the PRC government has significantly reduced its control over routine foreign exchange transactions under current accounts, including trade and service related foreign exchange transactions.  There can be no assurance that these PRC laws and regulations on foreign exchange transactions will not cast uncertainties on foreign investors’ ability to convert foreign currencies to RMB and provide lending capital for our marketplace.  While the adjustments related to foreign exchange transactions were relatively small in 2016, 2017 and 2018, the adjustments may be significant going forward if the RMB depreciates.  Changes in PRC foreign exchange policies might have a negative impact on our ability to attract foreign investors to our marketplace and could result in foreign investors choosing to provide their lending capital to our non-Chinese competitors, both of which would materially adversely affect our results of operations.  

Risks Related to Our Corporate Operation

Changes in PRC regulations relating to interest and fee rates for marketplace and micro-credit lending could have a material adverse effect on our business in our efforts to collect on delinquent loans.

The interest rate permitted to be charged on loans facilitated by our legacy marketplace lending platform is subject to limitations set forth in the Provisions of the Supreme People’s Court on Application of Laws to the Hearing of Private Lending Cases, or the Provisions on Private Lending Cases, which provide that (i) when the interest rate agreed between the borrower and investor does not exceed an annual interest rate of 24%, the People’s Court will uphold the interest rate charged by the investor, and (ii) when the interest rate agreed between the borrower and investor exceeds an annual interest rate of 36%, the portion in excess of 36% is void and the People’s Court will uphold the borrower’s claim for return of the excess portion to the borrower, and even place legal charges against the organization.  For loans with interest rates per annum between 24% and 36%, if the interest on the loans has already been paid to the investor, and so long as such payment has not damaged the interest of the state, the community or any third parties, the courts will not enforce the borrower’s demand for the return of such interest payment.

In August 2017, the Supreme People’s Court promulgated the Circular of Several Suggestions on Further Strengthening the Judicial Practice Regarding Financial Cases, or Circular 22, which provides that (i) PRC courts shall uphold borrower claims to adjust or reduce the aggregate amount of interest, compound interest, default interest, liquidated damages and other fees collectively claimed by the lender in excess of an annual interest rate of 24%, and (ii) in the context of online finance disputes, if the online lending intermediary platforms and the lenders circumvent the upper limit of the judicially protected interest rate by charging intermediary fees, such fees shall be ruled as invalid.  Circular 141 further requires that borrowers’ aggregated borrowing costs charged by institutions in the form of interest and fees should be annualized and subject to the private lending interest rate limits set forth in the Provisions on Private Lending Cases issued by the Supreme People’s Court.  We charge borrowers on our platform reasonable transaction fees, and the transaction fees we charge are recognized as our revenue. Historically, borrowers’ aggregate borrowing costs (including aggregate interest fees, transaction fees and other costs incurred by borrowers) exceeded 36%. Starting December 2017, we decreased our transaction and interest fees so as to ensure that borrowers’ aggregate borrowing costs on our platform are less than 36%.  In response to these regulatory changes to our legacy marketplace lending platform, our borrower behavior may change as some of existing borrowers might use it as excuse by saying that they borrowed the loans with high interest such that they don’t want to pay back the loans, and our business, financial condition and results of operations would be materially and adversely affected. We continue to have business arrangements with third party vendors and companies to facilitate our business, including third party vendors and companies that conduct most or substantially all of their business with us only.  Although these third parties are separate from us, for accounting purposes such as U.S. GAAP purposes their financials may be consolidated with us, which may result in the interpretation that the aggregate borrowing costs on our platform exceed 36% and other matters which PRC governmental authorities may deem to be non-compliant, any of which may result in our business, financial condition, results of operations and prospects being materially and adversely affected. Moreover, if the method of calculating the annualized borrowing costs used by the PRC governmental authorities or the PRC courts differs from our method causing the aggregate borrowing costs of loans we facilitate to be deemed to exceed the 36% per annum limit, the portion of the borrowing costs exceeding the 36% per annum limit may be ruled as invalid and we may (i) be required to change our business operations to be in compliance with this limit, (ii) receive a warning, correction order, condemnation or fines from the relevant regulators, or (iii) be required to reduce fees and lower the annual transaction and interest rate charged to our borrowers, any of which may result in our business, financial condition, results of operations and prospects being materially and adversely affected.

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Further, the Supreme People’s Court, Supreme People's Procuratorate, Ministry of Public Security and Ministry of Justice collectively promulgated the Opinions on Several Issues Concerning Handling Criminal Cases of Illegal Lending (hereinafter referred to as the “Opinions”). The Opinions came into force on October 21, 2019, and specify that no loan may have an interest rate that exceeds 36%. All fees including the introduction fees, consulting fees, management fees, overdue interest, and liquidated damages are included in the calculation of the annual interest rate, which means, all fees, no matter in what name we charge shall be included in the annual interest rate.

Further, Circular 141 and the Inspection Notice prohibit online lending information intermediaries from deducting interests, commissions, management fees or margins from investors’ loan disbursements to borrowers. No interest is collected in advance for any of the loans on our platform. However, we currently charge borrowers of lifestyle loans by deducting a transaction fee from each such borrower’s depository bank account in its own name after the loan principal has been transferred into such account, and then the funds, net of the transaction fees, are released to the borrower’s bank account from such depository bank account. We do not think such arrangement should be regarded as not in compliance with current regulations, but we cannot assure you that the PRC courts will hold the same view as ours, and parts or all of the transaction fees we collect from borrowers of lifestyle loans may not be upheld by the PRC courts.  The regulatory authorities may also hold the view that the current deduction arrangement will not comply with current regulations, and we may need to adjust our arrangement accordingly.  

Our legacy business to facilitate loans through our legacy marketplace lending platform could give rise to liabilities under PRC laws and regulations that prohibit illegal fundraising.

Except with the prior approval of applicable government authorities, PRC laws and regulations prohibit persons and companies from raising funds as a result of advertising a promise to repay premium or interest payments over time through payments in cash or in kind.  Failure to comply with these laws and regulations may result in penalties imposed by the PBOC, State Administration for Market Regulation, formerly known as the State Administration for Industry and Commerce, or SAIC, and other governmental authorities, and can lead to civil or criminal lawsuits.

To date, our legacy lending platform was not subject to any fines or other penalties under any PRC laws and regulations that prohibit illegal fundraising.  We believe that our legacy online lending platform did not violate PRC laws and regulations prohibiting illegal fundraising because our online only acts as a service provider in the facilitation of loans between borrowers and investors.  In this capacity, we did not raise funds or promise repayment of premium or interest obligations.  Nevertheless, considerable uncertainties exist with respect to the PBOC, SAIC and other governmental authorities’ interpretations of the fundraising-related laws and regulations.  While our agreements with investors require investors to guarantee the legality of all funds investors put on our legacy online, we did not verify the source of investors’ funds separately, and therefore, to the extent that investors’ funds are obtained through illegal fundraising, we may be negligently liable as a facilitator of illegal fundraising.  In addition, while our loan agreements contain provisions that require borrowers to use the proceeds for purposes listed in their loan applications, we did not monitor the borrowers’ use of funds on an on-going basis, and therefore, to the extent that borrowers use proceeds from the loans for illegal activities, we may be negligently liable as a facilitator of an illegal use.  Although we designed and implemented procedures to identify and eliminate instances of fraudulent conduct on our online, we may not have be able to identify all fraudulent conduct that may violate illegal fundraising laws and regulations.  

Many marketplace lending platform businesses are suspected of illegal fund-raising or other criminal crimes, resulting in the suspension of the platform business and the adoption of criminal measures by the executives; as a result, the platform executives and employees may leave the company, and the investors may withdraw their investment thus affecting the normal development of the platform business.

Since 2016, regulatory authorities have continuously changed the marketplace lending industry regulation framework. As more and more platforms ran into the difficulties to redeem investor lending capital when they are exiting the platforms, or the platforms have other operational risks, some of platforms are suspected to have engaged in illegal fund-raising and other illegal activities in their operation,  the legal system including police and court might place criminal charges against these platforms along with the senior executives of the companies, including criminal proceedings against their actual controlling persons and senior management.

The recent regulatory focus on the marketplace lending industry, including the criminalization of certain activities, and the overall decline in the marketplace lending industry has led to many employees, including senior management, leaving our company and the industry. The potential risk of criminal liabilities caused panic among people working for the online lending institutions and even many industry practitioners choose to withdraw

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voluntarily to avoid the risk of being investigated criminally. If the number of employees who make such a choice is large, and the platform cannot recruit new employees to fill the vacancy in time, it will inevitably affect the normal operation of our company, including our exit from our legacy marketplace lending business and our transition to fin-tech service platform.

In extreme cases, if investors believe that there are huge risks involved in the platform, such as the management of the platforms might run away, or there might be illegally activities involving lending capital abusing or moving around, or there might be fraudulent lending information presented to the investors, the investors might choose to report such risks to the public security organization.  In order to prevent and defuse the potential risks of the marketplace lending platform industry, the public security organization may take actions against the company, including seizing the senior management and assuming complete control of the platform.  Once the platform is investigated by the public security organization, the platform may need to cooperate with the investigation, and the relevant assets may also be seized which will seriously affect the normal operation of the platform.  As the company is wind down the legacy marketplace lending platform business, we are operating in the same sector and we are subject to the risk discussed here.

Senior executives from other marketplace lending platforms have been arrested for illegal fund raising activities.  

While the PRC government has put in place some regulations concerning the marketplace lending industry, there are still gaps in interpretations as to what is permitted and not permitted.  As a result senior executives from other marketplace lending platforms have been arrested for illegal fund raising activities conducted by their marketplace lending platforms.  Such violations by these marketplace lending platforms and arrests of their senior executives have an adverse impact on the credibility and trustworthiness of the entire marketplace lending industry, including our company.

Risks Related to Our Transition to Business of Facilitating Institutional Lending Capital for Our Target Borrowers

Our transition to facilitate institutional lending capital exposes us to regulatory uncertainties faced by those partners, and we may be required to obtain government approvals or licenses due to our cooperation with those partners, which could have a negative impact on our business and results of operations.

Our cooperation with institutional lenders has exposed us to, and may continue to expose us to, regulatory uncertainties faced by such institutional lenders. We cannot assure you that the business operations of our institutional lenders or our cooperation with these institutional lenders are, or will continue to be compliant with the relevant laws and regulations. For instance, Circular 141 requires financial institutions cooperating with third parties to engage in lending businesses (i) not outsource any core lending business (including credit assessment and risk control), (ii) not accept any credit enhancement provided by third parties with no guarantee approval or license, whether or not in a disguised form (including commitment to absorbing default risks), and (iii) ensure that no interests or fees are collected from borrowers by such third parties. Furthermore, Circular 141 prohibits online lending information intermediaries from facilitating financial institutions’ participation in online lending services. Our cooperation with institutional lenders may need to be modified, suspended or terminated, which may be time consuming and lead to insufficient funding supply on our marketplace and materially or adversely affect our business.

We are transitioning the focus of our business from our legacy marketplace lending platform to facilitate to institutional lending capital for target borrowers, and will need to adjust our operations to better suit this new business focus.

Due to the overall decline in the PRC marketplace lending industry and increased regulations it is increasingly difficult to earn a profit.  On April 15, 2019, we started the transition from the marketplace lending platform to a business of facilitating institutional lending capital, which provides financial technology, marketing services, and portfolio management services to financial institutions, including technology that identifies qualified prospective borrowers, portfolio management services and decisioning technology.  While we will continue to operate our legacy marketplace lending platform, such operations will be at a significantly reduced level as compared to current and past operations.   We have reduced our branch level oriented data verification centers nationwide and will retain a minimal collection force.  We no longer issue new loans and we have stopped acquiring new lenders and new borrowers. Going forward, the focus of our legacy marketplace lending platform will be on borrower payback, borrower collection and lender payment services.  

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During our transition from our legacy marketplace lending platform to the business of facilitating institutional lending capital, we will undergo organizational changes, including with respect to our employee workforce, senior management and entity operations. Such organizational changes will be costly and time consuming.  Our ability to manage these risks will directly impact the success of our business of facilitating institutional lending capital and our failure to do so could adversely impact our overall financial condition, results and cash flows.

There is market operation risk in Our Business Transition, as many marketplace platforms are exiting, some of them have run into difficulties, and the overall market perception towards the industry tends to be negative.

Because of the increasingly strict regulations faced by the online lending industry, many platforms originally engaged in the online lending business have transitioned into the business of facilitating institutional lending capital, however the regulations that pertain to this industry are still developing. The regulatory framework for the business of facilitating institutional lending capital is not clear, and therefore there is potential that the business of facilitating institutional lending capital may be negatively impacted by future regulations that restrict their business operations.

From time to time we may evaluate and potentially consummate acquisitions or alliances, which could require significant management attention, disrupt our business, adversely affect our financial results, be unsuccessful or fail to achieve the desired result.

We are evaluating and considering strategic transactions, combinations, acquisitions or alliances to enhance or complement our business of facilitating institutional lending capital, although we do not have a specific target yet. These transactions could be material to our financial condition and results of operations if consummated.  If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate the transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.

Any acquisition or alliance will involve risks commonly encountered in business relationships, including:

We may not make any acquisitions or consummate any alliances, or any future acquisitions or alliances may not be successful, may not benefit our business strategy, may not generate sufficient revenue to offset the associated costs or may not otherwise result in the intended benefits.  In addition, we cannot assure you that any future acquisition of, or alliance with respect to, new businesses or technology will lead to the successful development of new or enhanced loan products and services or that any new or enhanced loan products and services, if developed, will achieve market acceptance or prove to be profitable.

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We may encounter difficulties in transitioning our legacy marketplace lending business to the business of facilitating institutional lending capital, which could adversely affect our growth and business prospects.

We are transitioning the focus of our business to facilitate institutional lending capital. The development of our facilitating institutional lending capital business is subject to significant risks and uncertainties, including, without limitation, the following:

If we are not successful in the establishment of our new fin-tech empowered facilitating institutional lending capital, our growth, business, financial condition and results of operations could be adversely affected.  

We have a comparatively limited track record in facilitating institutional lending capital and cannot guarantee our success.  

In contrast to our 30 years of experience in the consumer credit marketplace and our experience in the marketplace lending industry, we entered the fin-tech empowered business of facilitating institutional lending capital to help borrowers to better access consumer credit with relatively short history.  Given that the fin-tech empowered facilitating institutional lending capital business in China is highly competitive and dominated by some well capitalized companies that can afford to use their capital to provide first-loss protection to the financial institutions. Our limited capital resources may impact our ability to be successful in our business transition. In addition, the success of our transition will depend upon our ability to:

We may not have a sufficient amount of initial capital to provide first-loss protection for institutional lenders, which may deter institutional lenders from engaging in business with us.  

Some institutional lenders may require partners to jointly contribute 20-33% of their own capital to participate the lending capital pool,  to originate the loans facilitated by the service provider, as first-loss protection. The required percentage of capital that institutional lenders is require is dependent on the overall risk level, track record, scale, and term of the partner relationship.  We may not have the sufficient initial capital reserves available to secure service arrangements for large institutional funds and in the business of facilitating institutional lending capital, we do not have an established reputation we lack reputation and may be considered high risk to institutional lenders, which may negatively impact our initial business development. As we plan to continue to operate our legacy lending business on a more limited scale, regulators and potential customers may associate our lend aid business with our legacy lending business platform, which may adversely affect our prospects.  

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Although we stopped facilitating loans for individual investors in April 2019, and have been transitioning from the legacy marketplace lending platform business, into a business of facilitating institutional lending capital, financial institutions may associate our facilitating lending capital  with our legacy marketplace lending business. In addition, regulators may scrutinize the business of facilitating institutional lending capital, which may subject us to investigation. If potential consumers are unable to differentiate our new business from our legacy marketplace lending platform, we may experience difficulty in attracting and securing new business prospects.    

We may not be able to compete successfully against our current or future competitors in the fin-tech services industry.

Some of our current and future competitors in the fin-tech empowered institutional lending capital facilitation industry  have competitive advantages over us, such as, being more recognizable and well established companies in the industry, operating new and different business models, maintaining lower operation cost, larger customer bases, more experience in the fin-tech services industry and greater financial, marketing, technology, human resources, and other expertise and resources. We cannot assure that we will always be able to successfully compete against our current or future competitors. If we are unable to compete successfully with our current or future competitors, our business, financial condition and results of operations could be adversely affected.

If our proprietary credit assessment technology is ineffective, our transition to the business of facilitating institutional lending capital may be less attractive to potential borrowers and institutional lenders, our reputation may be harmed and our market share could decline.

Our ability to attract potential borrowers and institutional lenders to, and build trust in, our new business is significantly dependent on our ability to effectively evaluate a potential borrower’s credit profile and likelihood of default, and thus maintain low loss ratios for investors on our marketplace.  We utilize our proprietary credit assessment technology, which encompasses our predictive selection technology, credit scoring technology and automated decisioning technology, to assign each potential borrower and loan offered a score.  Our proprietary advanced credit assessment technology allows for the evaluation and analysis of a number of factors, including historical behavioral data, transactional data, social data, search and employment information which may not effectively predict future loan losses.

We refine our proprietary credit assessment technology based on new data and changing macro-economic conditions.  However, these risk management measures may not always be adequate or effective. For example, our proprietary credit assessment technology may contain errors or defects that prevent us from effectively identifying fraudulent information supplied by borrowers.  To the extent the credit assessment technology we use to assess the creditworthiness of potential customers does not adequately identify potential risks, is ineffective or the data provided by potential borrowers or third parties is incorrect or stale, our loan pricing and approval process could be negatively affected, resulting in mispriced or misclassified loans.  These types of errors could make our platform less attractive to potential investors as well as potential borrowers, damage our reputation in the market and result in a decline in our market share.

We rely on data from third parties and prospective borrowers for the successful operation of our business transition, and this data may be inaccurate or may not accurately reflect the potential borrower’s creditworthiness, which may cause us to inaccurately price loans facilitated through our new business of facilitating institutional lending capital business and cause our reputation to be harmed.

Our ability to review and select quality potential borrowers and attract interested lenders depends on credit, identification, employment and other relevant information that we receive from prospective borrowers and third parties, including our data channel partners, PBOC credit reporting platforms, credit bureaus, association data systems, data vendors and social media and consumer transaction companies.  In addition to traditional data points used to analyze potential borrowers’ creditworthiness, we also rely on other behavioral data, including online, social media, search, browsing and transactional data.

Unlike many developed countries, China does not have a well-developed centralized credit reporting system nor is there widespread information sharing among consumer finance companies’ marketplaces.  Although we take steps to verify potential borrower data and identities as described elsewhere in this annual report, the potential borrower information may nevertheless be inaccurate or incomplete.  For example, for borrowers having a bank account, we rely on banks’ verification of identity.  In addition, we may not accurately identify potential borrowers who have already borrowed elsewhere, which may affect their ability to repay or otherwise cause us to violate the maximum lending limits under applicable PRC laws.    

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We use credit and other information about prospective borrowers to assign credit scores and corresponding grades to potential borrowers based on our proprietary advanced credit assessment technology.  If this information becomes unavailable or becomes more expensive to access, it could cause us to have to seek alternative sources of information or increase our costs.    

While our credit score serves to predict the likelihood of a potential borrower being able to repay a loan by taking into consideration hundreds of variables, it may not reflect that potential borrower’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate data, and we do not verify information obtained from third parties, other than as indicated elsewhere in this annual report.  Additionally, there is a risk that, following the date we obtain and review the information, a potential borrower may have:

The occurrence of any of these events would impact the creditworthiness of such potential borrower.

Although we do not permit borrowers to have more than one loan facilitated on our platform outstanding at a time, borrowers are not restricted from incurring additional unsecured or secured debt, nor are they required to post collateral or be subject to any financial covenants during the term of the loan.  We currently cannot determine whether borrowers have outstanding loans through other consumer finance marketplaces at the time they obtain a loan from us.  This creates the risk that a borrower may borrow money through our platform in order to pay off loans on other consumer finance marketplaces and vice versa.  If a borrower incurs additional debt before or after the date of the borrower’s loan, the additional debt may impair the ability of that borrower to make payments on his or her loan and the investor’s ability to receive the principal and interest payments that it expects to receive on the loan.  In addition, the additional debt may adversely affect the borrower’s creditworthiness generally, and could result in the financial distress, insolvency, or bankruptcy of the borrower.  To the extent that a borrower has or incurs other indebtedness and cannot pay all of his or her indebtedness, the obligations under the unsecured loans will rank pari passu to each other and the borrower may choose to make payments to other creditors rather than to the investor.

If institutional lenders do not receive returns that are satisfactory to them, they may be deterred from lending to our borrowers and our reputation may be harmed.

Failure to maintain relationships with our partners or implement our strategy to develop new relationships with other potential partners could have a material adverse effect on our business and results of operations.  

Our relationships with our partners are important to our future success, particularly with respect to our consumption loans and the data sources for our predictive selection, credit scoring and automated decisioning technologies.  However, our partners could choose to terminate their relationships with us or propose terms that we cannot accept.

One of our strategies is to continue to enter into new relationships with Internet companies, other marketplace lending companies, e-commerce platforms, online travel agencies, telecommunication service providers, trust companies, insurance companies, payment service providers and other institutions.  We intend to explore additional forms of relationships with our existing partners and pursue additional relationships with other potential strategic partners, such as social media companies, consumer transaction companies, banks, asset managers and insurance companies.  Identifying, negotiating and maintaining relationships with our partners requires significant time and resources as does integrating third-party data and services.  Our current agreements with our partners also do not prohibit them from working with our competitors or from offering competing services.  Our competitors may be effective in providing incentives to our partners to favor their products or services over ours, which could have the effect of reducing the volume of loans facilitated through our marketplace if our partners were to direct potential borrowers to other platforms or otherwise endorse our competitors’ products over ours.  Also, our partners may choose to offer competing offers to our borrowers and become a competitor themselves.  In addition, these partners may not perform as expected under our agreements with them, the benefits to us may not be as favorable as we expect and we may have disagreements or disputes with such partners, any of which could adversely affect our brand and reputation as well as our business operations.  If we cannot successfully enter into and maintain effective relationships with partners, our business and results of operations may be adversely affected.

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If we do not compete effectively in our target markets, our operating results could be harmed.

The PRC’s lending market is highly competitive and rapidly evolving.  We compete with financial products and companies that attract potential borrowers, investors or both.  With respect to borrowers, we primarily compete with other online platforms that facilitate consumer credits.  

Some of our current or potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their platforms and distribution channels.  Their business models may also ultimately prove more successful or more adaptable to new regulatory, technological and other developments.  Our current or potential competitors may also have longer operating histories, more extensive customer bases, more data and distribution channels, greater brand recognition and brand loyalty and broader customer and partnership relationships than we have.  For example, established Internet companies, including social media companies that possess large, existing customer bases, substantial financial resources and established distribution channels have entered and may continue to enter the market.  Other competitors in related markets, such as financial services, may expand their operations and enter the online lending business as well. Our competitors may be better at developing new products, responding quickly to new technologies and undertaking more extensive marketing campaigns.  If we are unable to compete with such companies or meet the need for innovation in our industry, the demand for our online could stagnate or substantially decline, we could experience reduced revenue or our online could fail to achieve or maintain more widespread market acceptance, any of which could harm our business.

When new competitors seek to enter our target market, or when existing market participants seek to increase their market share, they sometimes undercut the pricing and/or terms common place in that market, which could adversely affect our market share or ability to exploit new market opportunities.  In addition, since the consumer credit industry is a relatively recent development in China, potential investors and borrowers may not fully understand how our platform works and may not be able to fully appreciate the additional customer protections and features that we have invested in and adopted on our platform as compared to other online lending platforms.  Further, to the extent that our competitors are able to offer more attractive terms to our cooperation partners, such cooperation partners may choose to terminate their relationships with us.  All of the foregoing could adversely affect our business, results of operations, financial condition and future growth.

Our business, financial condition and results of operations have been and are likely to be adversely affected by the outbreak of COVID-19.

China has experienced an outbreak of COVID-19 in the first quarter of 2020 and the virus is spreading rapidly to many parts of the world recently. The severity of the outbreak in certain provinces resulted in travel restrictions, quarantines and business closures imposed by local governments across China and materially affected general commercial activities in China. In response to this outbreak, from January 2020 to February 2020, we temporarily closed all of our corporate offices and requested all employees to work remotely. The travel restrictions and quarantines also prevented our customer service, business development and other business activities. The outbreak of COVID-19 has caused and may continue to cause significant slowdown of economic growth in China and globally, which may lead to adverse impact on our business. Furthermore, the slowdown of economic growth adversely affects the stability of, and investors’ confidence in, the financial market, making it more difficult for us to raise additional capital necessary for our continued operation. All of these would negatively affect our business operation, financial condition and results of operations. We have been taking measures in response to the outbreak, including the adoption of modified operating hours and remote working arrangements which may also have negative impact on our business operation.

Although the pandemic has been contained to a certain extent in China since March 2020, there is great uncertainty as to the future progress of the disease, such as continued spread or recurrence of contagion, the implementation and effectiveness of preventative and containment measures, and the development of medical solutions. Currently, there is no vaccine or specific anti-viral treatment for COVID-19. Relaxation of restrictions on economic may lead to new cases which may lead to the reintroduction of restrictions. The extent to which this outbreak impacts our business and financial performance will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the duration and severity of this outbreak and the actions taken by authorities and other entities to contain this outbreak.

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Risks Related to Our Newly Acquired Emergency Rescue Service Provider Business

We rely on data center providers, Internet infrastructure, bandwidth providers, third-party computer hardware and software, other third parties and our own systems for providing services to our emergency rescue clients and end-users, and any failure or interruption in the services provided by these third parties or our own systems could expose us to litigation and negatively impact our relationships with clients, adversely affecting our brand and our business.

We serve all of our emergency rescue clients and end-users leveraging a multi cloud architecture using multiple vendors. This architecture provides redundancy and cost savings, and reduces our reliance on one single vendor. While we control and have access to our servers, we do not control the operation of these facilities. The cloud vendors and the owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our cloud vendors or data center operators is acquired, we may be required to transfer our servers and other infrastructure to a new vendor or a new data center facility, and we may incur significant costs and possible service interruption in connection with doing so. Problems faced by our cloud vendors or third-party data center locations with the telecommunications network providers with whom we or they contract or with the systems by which our telecommunications providers allocate capacity among their clients, including us, could adversely affect the experience of our clients. In addition, any financial difficulties, such as bankruptcy faced by our cloud vendors or third-party data centers operators or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict.

Additionally, if our cloud or data centers vendors are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business. For example, a rapid expansion of our business could affect the service levels at our cloud vendors or data centers or cause such cloud systems or data centers and systems to fail. Any changes in third-party service levels at our cloud vendors or data centers or any disruptions or other performance problems with our solution could adversely affect our reputation and may damage our clients’ stored files or result in lengthy interruptions in our services. Interruptions in our services may reduce our revenue, cause us to issue refunds to clients for prepaid and unused subscriptions, subject us to potential liability or adversely affect client renewal rates.

We also rely on computer hardware purchased or leased and software licensed from third parties in order to offer our services. However, it is possible that this hardware and software may not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could result in delays in the provisioning of our services until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated.

We exercise limited control over third-party vendors, which increases our vulnerability to problems with technology and information services they provide. Interruptions in our network access and telecommunication services may reduce our revenue and cause us to issue refunds to clients.

Additionally, if our cloud or data centers vendors are unable to keep up with our growing needs for capacity, this could have an adverse effect on our business. For example, a rapid expansion of our business could affect the service levels at our cloud vendors or data centers or cause such cloud systems or data centers and systems to fail. Any changes in third-party service levels at our cloud vendors or data centers or any disruptions or other performance problems with our solution could adversely affect our reputation and may damage our clients’ stored files or result in lengthy interruptions in our services. Interruptions in our services may reduce our revenue, cause us to issue refunds to clients for prepaid and unused subscriptions, subject us to potential liability or adversely affect client renewal rates.

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In addition, our ability to deliver our Internet-based services and telecommunication services depend on the development and maintenance of the infrastructure of the Internet by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, bandwidth capacity, and security. Our services are designed to operate without interruption in accordance with our service level commitments. However, we have experienced and expect that we may experience future interruptions and delays in services and availability from time to time. In the event of a catastrophic event with respect to one or more of our systems, we may experience an extended period of system unavailability, which could negatively impact our relationship with clients. To operate without interruption, both we, our service providers, and our telephone operator must guard against:

We exercise limited control over third-party vendors, which increases our vulnerability to problems with technology and information services they provide. Interruptions in our network access and telecommunication services may reduce our revenue and cause us to issue refunds to clients.

If our security measures fail or are breached and unauthorized access to a client's data is obtained, our emergency rescue services may be perceived as insecure, we may incur significant liabilities, our reputation may be harmed, and we could lose sales, clients, and end-users.

Our services involve the storage and transmission of clients’ and our users’ proprietary information, sensitive or confidential data, including valuable intellectual property and personal information of employees and clients, as well as the protected health information (“PHI”) and financial data information of our users. Because of the extreme sensitivity of the information we store and transmit, the security features of our computer, network, and communications systems infrastructure are critical to the success of our business. A breach or failure of our security measures could result from a variety of circumstances and events, including third-party action, employee negligence or error, malfeasance, computer viruses, cyber-attacks by computer hackers, failures during the process of upgrading or replacing software and databases, power outages, hardware failures, telecommunication failures, user errors, or catastrophic events. Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. As cyber threats continue to evolve, we may be required to expend additional resources to further enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. If our security measures fail or are breached, it could result in unauthorized persons accessing sensitive client or member data (including PHI and financial data), a loss of or damage to our data, an inability to access data sources, or process data or provide our services to our clients. Such failures or breaches of our security measures, or our inability to effectively resolve such failures or breaches in a timely manner, could severely damage our reputation, adversely affect clients and users or investors’ confidence in us, and reduce the demand for our services from existing and potential clients. In addition, we could face litigation, damages for contract breach, monetary penalties, or regulatory actions for violation of applicable laws or regulations, and incur significant costs for remedial measures to prevent future occurrences and mitigate past violations.

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There are numerous laws governing privacy and the storage, sharing, use, disclosure and protection of personally identifiable information and user data. Specifically, personally identifiable and other confidential information is increasingly subject to legislation and regulations in numerous domestic and international jurisdictions. On November 7, 2016, the Standing Committee of the National People’s Congress issued the Cyber Security Law, which came into effect on June 1, 2017. The Cyber Security Law stipulates that a network operator, including internet information service provider among others, must adopt technical measures and other necessary measures in accordance with the applicable laws and regulations as well as compulsory national and industrial standards to safeguard the safety and stability of network operations, effectively respond to network security incidents, prevent illegal and criminal activities, and maintain the integrity, confidentiality and availability of network data. Although we take measures to comply with the Cyber Security Law and the applicable laws, regulations and standards, and we believe our current business operation is in line with the requirements under the Cyber Security Law and the applicable laws, regulations and standards, there can be no assurance that our measures will be effective and sufficient under the Cyber Security Law and the applicable laws, regulations and standards. If we were found by the regulatory authorities to have violated the Cyber Security Law and the applicable laws, regulations and standards, we would be subject to warnings, fines, confiscation of illegal revenue, revocation of licenses, cancellation of filings, shutdown of our platform or even criminal liability and our business, results of operations and financial condition would be materially adversely affected. In addition, the regulatory framework for privacy protection in China and worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. 

We may experience cyber-security and other breach incidents that remain undetected for an extended period. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security occurs, or if we are unable to effectively resolve such breaches in a timely manner, the market perception of the effectiveness of our security measures could be harmed and we could lose sales, clients and users, which could have a material adverse effect on our business, operations, and financial results. Any systems failure or security breach or lapse that results in the unauthorized release of our user data could harm our reputation and brand and, consequently, our business, in addition to exposing us to potential legal liability.

We are exposed to risks associated with the implementation of laws and regulations on data privacy in China.

We collect, store and process certain personal and other sensitive data from our clients and end-users of our emergency rescue services. The secure transmission of confidential information over the Internet and telecommunication is essential in maintaining customer confidence in us. We conduct a significant portion of our communication and transaction by Internet or telephone. Any failure or perceived failure by us to prevent information security breaches or to comply with privacy policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other customer data, could cause our customers to lose trust in us, expose us to legal claims, and adversely affect our operating results. Nonetheless, given its great commercial value, our customer data may still likely to be misused by third parties, which could expose us to legal and regulatory risks and seriously harm our business.

We are subject to domestic laws and regulations relating to the collection, use, storage, transfer, disclosure and security of personally identifiable information with respect to our customers and employees including any requests from regulatory and government authorities relating to this data. In recent years, PRC government authorities have promulgated laws and regulations on Internet use to protect personal information from any unauthorized disclosure. The Decision on Strengthening Network Information Protection and the Regulation on Protection of Personal Information of Telecommunication and Internet Users provide that information that identifies a citizen, the time or location for his use of telecommunication and Internet services, or involves privacy of any citizen such as his or her birth date, ID card number, and address is protected by law and must not be unlawfully collected or provided to others. Independent Connection Provider (“ICP”) operators collecting or using personal electronic information of citizens must specify the purposes, manners and scopes of information collection and uses, obtain consent of the relevant citizens, and keep the collected personal information confidential. ICP operators are prohibited from disclosing, tampering with, damaging, selling or illegally providing others with, collected personal information. ICP operators are also prohibited from collection and use of personal information after a user has stopped using the services. We share our clients’ identifiable data and information with our third-party telephone operators when the third-party operators need to verify caller’s identity. Any misuse of our clients’ and users’ identifiable information by our third-party operators or our employees may bring civil litigations or administrative fines to the company.  

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Further, PRC regulators have been increasingly focused on regulation in the areas of data security and data protection. We expect that these areas will receive greater public scrutiny and attention from regulators, which could increase our compliance costs and subject us to heightened risks and challenges. If we are unable to manage these risks, we could become subject to penalties, fines, suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.

If we cannot implement our solution for clients’ and users’ emergency rescue requests or resolve any technical issues in a timely manner, we may lose clients and our reputation may be harmed.

Our clients depend on our support services and professional emergency rescue system to resolve their issues, including health emergency, vehicle breakdown, and financial distress. We may be unable to respond quickly enough to accommodate short-term increases in member demand for support services, particularly as we increase the size of our client bases and face the uncertainties during the COVID-19 pandemic. Furthermore, our solution must tailor our clients’ specific personal requests in a timely manner and coordinate with our business partners to implement the plan if necessary. It is difficult to predict clients’ demand for emergency help, and if clients demand increases significantly, we may be unable to provide satisfactory support services to our clients. Further, if we are unable to address clients’ needs in a timely fashion or further develop and enhance our solution, or if a client or member is not satisfied with the quality of work performed by us or with the technical support services rendered, then we could incur additional costs to address the situation or be required to issue credits or refunds for amounts related to unused services, and our profitability may be impaired and clients’ dissatisfaction with our solution could damage our ability to expand the number of applications and services purchased by such clients. These clients may not renew their contracts, while instead seeking to terminate their relationship with us or renew on less favorable terms. Moreover, negative publicity related to our client relationships, regardless of its accuracy, may further damage our business by affecting our reputation or ability to compete for new business with current and prospective clients. If any of these were to occur, our revenue may decline and our business, financial condition and results of operations could be adversely affected.

We operate in a competitive industry, and if we are not able to compete effectively, our business, financial condition and results of operations will be harmed.

While the emergency rescue market is in an early stage of development in PRC, it is competitive and we expect it to attract increased competition, which could make it difficult for us to succeed, especially after the COVID-19 outbreak in PRC. For example, we currently face competition in our telehealth service, vehicle breakdown service, and financial distress relief service from a range of companies, including specialized software and solution providers, insurance companies, and financial institutions that offer similar solutions and that are continuing to develop additional products and becoming more sophisticated and effective. These competitors include Ping An Good Doctor, Ding Xiang Doctor, and Ali Health among other smaller telehealth service participants. In addition, large, well-financed health plans have in some cases developed their own telehealth or expert medical service tools and may provide these solutions to their customers at discounted prices. Some vehicle insurance providers also provide vehicle emergency rescue service in the PRC. Competition from specialized software and solution providers, health plans and vehicle insurer will result in continued pricing pressures, which is likely to lead to price declines in certain product segments, which could negatively impact our sales, profitability and market share.

Some of our competitors may have greater name recognition, longer operating histories and significantly greater resources than we do. Further, our current or potential competitors may be acquired by third parties with greater available resources. As a result, our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements and may have the ability to initiate or withstand substantial price competition. Accordingly, new competitors or alliances may emerge that have greater market share, a larger customer base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces than we have, which could put us at a competitive disadvantage. Our competitors could also be better positioned to serve certain segments of the telehealth, vehicle emergency rescue, and financial distress relief market, which could create additional price pressure. In light of these factors, even if our solution is more effective than those of our competitors, current or potential clients may accept competitive solutions in lieu of purchasing our solution. If we are unable to successfully compete in the telehealth market, our business, financial condition and results of operations could be materially adversely affected.

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If we fail to manage our growth effectively, our expenses could increase more than expected, our revenue may not increase, and we may be unable to implement our business strategy.

We have experienced significant growth in recent periods, which puts strain on our business, operations and employees.  We have also increased our client bases significantly over the past two years. We anticipate that our operations will continue to rapidly expand. To manage our current and anticipated future growth effectively, we must continue to enhance our IT infrastructure, financial and accounting systems, and maintain our relationship with third-party telephone operators, professional medical service providers, vehicle maintenance providers, and financial institutions. We must also attract, train and retain a significant number of qualified sales and marketing personnel, customer support personnel, professional services personnel, software engineers, technical personnel and management personnel, and the availability of such personnel, in particular software engineers, may be constrained.

A key aspect to managing our growth is our ability to scale our capabilities to implement our solution satisfactorily with respect to both large and demanding clients, who currently constitute the substantial majority of our client base, as well as smaller clients who are becoming an increasingly larger portion of our client base. Large clients often require specific features or functions unique to their membership base, which, at a time of significant growth or during periods of high demand, may strain our implementation capacity and hinder our ability to successfully implement our solution to our clients in a timely manner. We may also need to make further investments in our technology and automate portions of our solution or services to decrease our costs. If we are unable to address the needs of our clients or users, or our clients or members are unsatisfied with the quality of our solution or services, they may not renew their contracts, seek to cancel or terminate their relationship with us or renew on less favorable terms, any of which could cause our annual net dollar retention rate to decrease.

Failure to effectively manage our growth could also lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, systems or controls, give rise to operational mistakes, financial losses, loss of productivity or business opportunities and result in loss of employees and reduced productivity of remaining employees. Our growth is expected to require significant capital expenditures and may divert financial resources from other projects such as the development of new applications and services. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our revenue may not increase or may grow more slowly than expected and we may be unable to implement our business strategy. The quality of our services may also suffer, which could negatively affect our reputation and harm our ability to attract and retain clients.

Economic uncertainties or downturns in the general economy or the industries in which our clients operate could disproportionately affect the demand for our solution and negatively impact our results of operations.

General worldwide economic conditions have experienced significant downturns during the global pandemic, and market volatility and uncertainty remain widespread, making it potentially very difficult for our clients and us to accurately forecast and plan future business activities. During challenging economic times, our clients or users may have difficulty gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to make timely payments to us and adversely affect our revenue. If that were to occur, our financial results could be harmed. Further, challenging economic conditions may impair the ability of our clients to pay for the applications and services they already have purchased from us and, as a result, our write-offs of accounts receivable could increase. We cannot predict the timing, strength or duration of any economic slowdown or recovery. If the condition of the general economy or markets in which we operate worsens, our business could be harmed.

Natural or man-made disasters and other similar events may significantly disrupt our business and negatively impact our business, financial condition and results of operations.

Our offices may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, power outages, fires, floods, nuclear disasters, diseases, virus, and acts of terrorism or other criminal activities, which may render it difficult or impossible for us to operate our business for some period of time. Any disruptions in our operations related to the repair or replacement of our offices, could negatively impact our business and results of operations and harm our reputation.

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Furthermore, the implementation of our emergency rescue service relies on our business partners, who provide urgent support, including medical first-aid service, vehicle maintenance service, and temporary financial distress relief service, to our clients. Our business partners may not be able to meet our clients’ emergency need under some natural or man-made disasters. Any such losses or damages could have a material adverse effect on our business, financial condition and results of operations.

If our new services are not adopted by our clients, or if we fail to innovate and develop new applications and services that are adopted by our clients, our revenue and results of operations will be adversely affected.

To date, we have derived a substantial majority of our revenue from sales of our primary care telehealth service, urgent vehicle breakdown rescue service, and temporary financial aid service, and our longer-term results of operations and continued growth will depend on our ability successfully to develop and market new applications and services that our clients want and are willing to use. In addition, we have invested, and will continue to invest, significant resources in research and development to enhance our existing solution and introduce new high-quality applications and services. If existing clients are not willing to make additional payments for such new applications, or if new clients do not value such new applications, it could have a material adverse effect on our business, financial condition and results of operations. If we are unable to predict user preferences or if our industry changes, or if we are unable to modify our solution and services on a timely basis, we may lose clients. Our results of operations would also suffer if our innovations are not responsive to the needs of our clients, appropriately timed with market opportunity or effectively brought to market.

A decline in the prevalence of employer-sponsored emergency rescue or the emergence of new technologies may render our tele-emergency solution obsolete or require us to expend significant resources in order to remain competitive.

The PRC tele-emergency rescue industry is massive, with a number of large market participants with conflicting agendas, is subject to government regulation. Changes in our industry, for example, the emergence of new technologies as more competitors enter our market, could result in our telehealth emergency rescue being less desirable or relevant.

For example, we currently derive the majority of our revenue from sales to corporate clients that purchase our service as an employment benefit for their employees. A large part of the demand for our solution depends on the need of these employers to manage the costs of healthcare and other emergency rescue services that they pay on behalf of their employees. There is no guarantee that we would be able to compensate for the loss in revenue from employers by increasing sales of our solution to health insurance companies or to individuals or government agencies. In such a case, our results of operations would be adversely affected.

If emergency rescue benefits trends shift or entirely new technologies are developed that replace existing solutions, our existing or future solutions could be rendered obsolete and our business could be adversely affected. In addition, we may experience difficulties with software development, industry standards, design or marketing that could delay or prevent our development, introduction or implementation of new applications and enhancements.

If our third-party telephone operators or emergency service providers are characterized as employees, we would be subject to employment and withholding liabilities.

We structure our relationships with our emergency service providers and third-party telephone operators in a manner that we believe results in an independent contractor relationship, not an employee relationship. An independent contractor is generally distinguished from an employee by his or her degree of autonomy and independence in providing services. A high degree of autonomy and independence is generally indicative of a contractor relationship, while a high degree of control is generally indicative of an employment relationship. Although we believe that our providers and experts are properly characterized as independent contractors, tax, labor department, or other regulatory authorities may in the future challenge our characterization of these relationships. If such regulatory authorities or courts were to determine that our providers or experts are employees, and not independent contractors, we would be required to pay social security, medical insurance, unemployment insurance, and other related payroll taxes. We would also be liable for unpaid past benefits and subject to penalties. As a result, any determination that our providers or experts are our employees could have a material adverse effect on our business, financial condition and results of operations.

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We could incur substantial costs as a result of any claim of infringement of another party’s intellectual property rights.

In recent years, there has been significant litigation in the PRC involving patents and other intellectual property rights. Companies in the Internet and technology industries are increasingly bringing and becoming subject to suits alleging infringement of proprietary rights, including patent rights and software copyright, and our competitors and other third parties may hold patents and copyrights or have pending patent and copyright applications, which could be related to our business. These risks have been amplified by the increase in third parties, which we refer to as non-practicing entities, whose sole primary business is to assert such claims. Regardless of the merits of any other intellectual property litigation, we may be required to expend significant management time and financial resources on the defense of such claims, and any adverse outcome of any such claim or the above referenced review could have a material adverse effect on our business, financial condition or results of operations. We expect that we may receive in the future notices that claim we or our clients using our solution have misappropriated or misused other parties’ intellectual property rights, particularly as the number of competitors in our market grows and the functionality of applications amongst competitors overlaps. Our any future litigation, whether or not successful, could be extremely costly to defend, divert our management’s time, attention and resources, damage our reputation and brand and substantially harm our business.

If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us, such payments or costs could have a material adverse effect on our business, financial condition and results of operations.

If our existing clients do not continue or renew their contracts with us, renew at lower fee levels or decline to purchase additional applications and services from us, it could have a material adverse effect on our business, financial condition and results of operations.

We expect to derive a significant portion of our revenue from renewal of existing client contracts and sales of additional applications and services to existing clients. As part of our growth strategy, for instance, we have recently focused on expanding our services amongst current Clients. As a result, selling additional services is critical to our future business, revenue growth and results of operations.

Factors that may affect our ability to sell additional services include, but are not limited to, the following:

We enter into subscription access contracts with our corporate clients. These contracts generally have stated initial terms of one year. Most of our clients have no obligation to renew their subscriptions for our solution after the initial term expires. In addition, our clients may negotiate terms less advantageous to us upon renewal, which may reduce our revenue from them. Our future results of operations also depend, in part, on our ability to expand into new clinical specialties and across care settings and use cases. If our corporate clients fail to renew their contracts, renew their contracts upon less favorable terms or at lower fee levels or fail to purchase new products and services from us, our revenue may decline, or our future revenue growth may be constrained.

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In addition, after the initial contract year, a significant number of our client contracts allow clients to terminate such agreements for convenience at certain times, typically with one to three months advance notice. We typically incur the expenses associated with integrating a client’s data into our interactive communication database and related training and support prior to recognizing meaningful revenue from such client. If a client terminates its contract early and revenue and cash flows expected from a client are not realized in the time period expected or not realized at all, our business, financial condition and results of operations could be adversely affected.

Risks Related to Doing Business in China

Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us.

The PRC legal system is based on written statutes.  Unlike common law legal systems, prior court decisions may be cited for reference but have limited precedential value.  The PRC legal system evolves rapidly, and the interpretations of many laws, regulations and rules may contain inconsistencies and enforcement of these laws, regulations and rules involves uncertainties.

In particular, PRC laws and regulations concerning the marketplace lending industry are developing and evolving. Although 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 CBIRC, and avoid conducting any non-compliant activities under the applicable laws and regulations, such as illegal fund-raising, forming capital pool or providing guarantee to investors, the PRC government authority may promulgate new laws and regulations regulating the marketplace lending industry in the future. We cannot assure you that our practice would not be deemed to violate any new PRC laws or regulations relating to the marketplace lending industry. Moreover, developments in the marketplace lending industry may lead to changes in PRC laws, regulations and policies or in the interpretation and application of existing laws, regulations and policies that may limit or restrict companies like us, which could materially and adversely affect our business and operations. Furthermore, we cannot rule out the possibility that the PRC government will institute a licensing regime covering our industry at some point in the future. If such a licensing regime were introduced, we cannot assure you that we would be able to obtain any newly required license in a timely manner, or at all, which could materially and adversely affect our business and impede our ability to continue our operations.

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights.  However, since PRC judicial and administrative authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of a judicial or administrative proceeding than in more developed legal systems.  Furthermore, the PRC legal system is based, in part, on government policies and internal rules, some of which are not published in a timely manner, or at all, but which may have retroactive effect.  As a result, we may not always be aware of any potential violation of these policies and rules.  Such unpredictability towards our contractual, property (including intellectual property) and procedural rights could adversely affect our business and impede our ability to continue our operations.

The Foreign Investment Law of the People's Republic of China and its Implementation Regulations came into force on January 1, 2020. According to Foreign Investment Law of the People's Republic of China, the organization form, institutional framework and standard of conduct of a foreign-funded enterprise shall be subject to the provisions of the Company Law of the People's Republic of China, the Partnership Enterprise Law of the People's Republic of China, and other laws. With the coming into force of the new law, the Law of the People's Republic of China on Sino-Foreign Equity Joint Ventures, the Law of the People's Republic of China on Wholly Foreign-owned Enterprises and the Law of the People's Republic of China on Sino-Foreign Cooperative Joint Ventures shall be repealed simultaneously. Foreign-funded enterprises, which were established in accordance with the Law of the People's Republic of China on Sino-Foreign Equity Joint Ventures, the Law of the People's Republic of China on Wholly Foreign-owned Enterprises and the Law of the People's Republic of China on Sino-Foreign Cooperative Joint Ventures before the implementation of the Law, may retain their original organization forms and other aspects for five years upon the implementation hereof. Specific implementation measures shall be formulated by the State Council. Although the Foreign Investment Law did not address the VIE issues as its Draft seeking public comments did, the Foreign Investment Law and its Implementation Regulations may materially impact our corporate governance practices and increase our compliance costs, for example, through the imposition of stringent ad hoc and periodic information reporting requirements.

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Changes in China’s economic, political or social conditions or government policies could have a material and adverse effect on our business and results of operations.

Our revenues are substantially sourced from China.  Accordingly, our results of operations, financial condition and prospects are influenced by economic, political and legal developments in China.  Economic reforms begun in the late 1970s have resulted in significant economic growth.  However, any economic reform policies or measures in China may from time to time be modified or revised.  For instance, if interest rates are liberalized, our competition with traditional banks could be intensified.  

China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources.  Although the Chinese 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 Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through strategically allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policies and providing preferential treatment to particular industries or companies.  

Although the Chinese economy has grown significantly in the past decade, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, the Chinese economy has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and materially and adversely affect our business and results of operations. Furthermore, in early 2020, the outbreak of novel coronavirus epidemic in China had a serious impact on the Chinese economy. The epidemic and measures to combat the epidemic led to closure of businesses and unemployment, which could have a negative impact on the ability of the borrowers in our legacy marketplace lending platform to repay the loan.    

A downturn in the Chinese or global economy could reduce the demand for consumer loans and investments, which could materially and adversely affect our business and financial condition.

The global financial markets have experienced significant disruptions since 2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from the lows of 2008 and 2009 has been uneven and is facing new challenges, including the escalation of the European sovereign debt crisis from 2011 and the slowdown of the Chinese economy since 2012. It is unclear whether the Chinese economy will resume its high growth rate. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have also been concerns over unrest in Ukraine, the Middle East and Africa, which have resulted in volatility in financial and other markets. There have also been concerns about the economic effect of the tensions in the relationship between China and surrounding Asian countries and between China and the U.S. The recent trade disputes between the U.S. and China and the imposition of higher tariffs by the U.S. government for the importation of goods manufactured in China have brought upon a level of uncertainty for many Chinese companies concerning the strength of China’s economy.  The proposed tariffs may result in the depreciation of the Renminbi and the contraction of certain PRC industries.  As such, there may be a potential decrease in the spending powers of our target demographics.  In addition, economic conditions in China are sensitive to global economic conditions. Any prolonged slowdown in the global or Chinese economy may reduce the demand for consumer loans and investments and have a negative impact on our business, results of operations and financial condition. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.    

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Under the PRC Enterprise Income Tax Law, we may be classified as a PRC “resident enterprise,” which could result in unfavorable tax consequences to us and our ADS holders and shareholders and have a material adverse effect on our results of operations and the value of your investment.

While we currently do not generate revenue outside of China, under the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income.  In 2009, the State Administration of Taxation, or the SAT, issued the Notice Regarding the Determination of Chinese-Controlled Overseas Incorporated Enterprises as PRC Tax Resident Enterprise on the Basis of De Facto Management Bodies, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China.  Further to SAT Circular 82, in 2011, the SAT issued the Administrative Measures for Enterprise Income Tax of Chinese-Controlled Offshore Incorporated Resident Enterprises (Trial), or SAT Bulletin 45, to provide more guidance on the implementation of SAT Circular 82.

According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be considered a PRC resident enterprise by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following conditions are met:  (a) the senior management and core management departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board of directors and shareholders’ meetings are located or kept in the PRC; and (d) more than half of the enterprise’s directors or senior management with voting rights habitually reside in the PRC.

Although SAT Circular 82 and SAT Bulletin 45 only apply to offshore-incorporated enterprises controlled by PRC enterprises or PRC enterprise groups and not those controlled by PRC individuals or foreigners, the determination criteria set forth therein may reflect the SAT’s general position on how the term “de facto management body” could be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.

If the PRC tax authorities determine that we or any of our non-PRC subsidiaries is a PRC resident enterprise for PRC enterprise income tax purposes, then we or any such non-PRC subsidiary could be subject to PRC tax at a rate of 25% on our worldwide income, which could materially reduce our net income.  In addition, we also would be subject to PRC enterprise income tax reporting obligations.

If the PRC tax authorities determine that our company is a PRC resident enterprise for PRC enterprise income tax purposes, gains realized on the sale or other disposition of ADSs or ordinary shares and dividends distributed to our non-PRC shareholders may be subject to PRC withholding tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty or similar arrangement), if such gains are deemed to be from sources within the PRC.  Any such tax may reduce the returns on your investment in the ADSs.

Dividends payable to our foreign investors and gains on the sale of our ADSs or ordinary shares by our foreign investors may become subject to PRC tax.

Under the PRC Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends payable 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, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of ADSs or ordinary shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our ordinary shares or ADSs, and any gain realized from the transfer of our ordinary shares or ADSs, may be treated as income derived from sources within the PRC and may as a result be subject to PRC taxation.

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Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer of ADSs or ordinary shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions, if such dividends or gains are deemed to be from PRC sources. If we or any of our subsidiaries established outside China are considered a PRC resident enterprise, it is unclear whether holders of our ADSs or ordinary 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 payable to our non-PRC investors, or gains from the transfer of our ADSs or ordinary 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 our ADSs or ordinary shares may decline significantly.

We may not be able to obtain certain benefits under relevant tax treaty on dividends paid by our PRC subsidiaries to us through our Hong Kong subsidiary.

We are a holding company existing under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity from our PRC subsidiaries to satisfy part of our liquidity requirements.  Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment.  Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, such withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC enterprise.  However, the 5% withholding tax rate does not automatically apply and certain requirements must be satisfied, including without limitation that (a) the Hong Kong enterprise must be the beneficial owner of the relevant dividends; and (b) the Hong Kong enterprise must directly hold no less than 25% share ownership in the PRC enterprise during the 12 consecutive months preceding its receipt of the dividends.

In addition, the SAT promulgated the Circular on Comprehension and Recognition of “Beneficial Owner” under Tax Treaties, or SAT Circular 601, on October 27, 2009, which provides that tax treaty benefits will be denied to “conduit” or shell companies without business substance, and that “substance over form” principles will be used to determine beneficial ownership for purposes of receiving tax treaty benefits.  For this purpose, a conduit company is a company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating profits. As a result, we will not be able to enjoy the 5% withholding tax rate with respect to any dividends or distributions made by our PRC subsidiaries to its parent company in Hong Kong if our Hong Kong subsidiary is regarded as a “conduit company.”  Furthermore, in current practice, a Hong Kong enterprise must obtain a tax resident certificate from the Hong Kong tax authority to apply for the 5% lower PRC withholding tax rate.  As the Hong Kong tax authority will issue such a tax resident certificate on a case-by-case basis, we cannot assure you that we will be able to obtain the tax resident certificate from the relevant Hong Kong tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by our PRC subsidiaries to CRF China Holding Co. Limited, our Hong Kong subsidiary.

The PRC tax authorities’ heightened scrutiny over acquisition transactions may have a negative impact on our business operations or our acquisitions or the value of your investment in us.

The State Administration of Taxation has promulgated several rules and notices to tighten the scrutiny over acquisition transactions in recent years, including the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises in 2009 with retroactive effect from January 1, 2008, or SAT Circular 698, the Notice on Several Issues Regarding the Income Tax of Non-PRC Resident Enterprises in 2011, or SAT Circular 24, and the Notice on Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-PRC Resident Enterprises in February 2015, or SAT Circular 7.  Pursuant to these rules and notices, if a non-PRC resident enterprise transfers its equity interests in a PRC tax resident enterprise, such non-PRC resident transferor must report to the tax authorities at the place where the PRC tax resident enterprise is located and is subject to a PRC withholding tax of up to 10%.  In addition, if a non-PRC resident enterprise indirectly transfers so-called PRC Taxable Properties, referring to properties of an establishment or a place of business in China, real estate properties in China and equity investments in a PRC tax resident enterprise, by disposition of the equity interests in an overseas non-public holding company without a reasonable commercial purpose and resulting in the avoidance of PRC enterprise income tax, the transfer will be re-characterized as a direct transfer of the PRC Taxable

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Properties and gains derived from the transfer may be subject to a PRC withholding tax of up to 10%.  SAT Circular 7 has listed several factors to be taken into consideration by the tax authorities in determining if an indirect transfer has a reasonable commercial purpose.  However, regardless of these factors, an indirect transfer satisfying all the following criteria will be deemed to lack a reasonable commercial purpose and be taxable in the PRC:  (i) 75% or more of the equity value of the intermediary enterprise being transferred is derived directly or indirectly from PRC Taxable Properties; (ii) at any time during the one-year period before the indirect transfer, 90% or more of the asset value of the intermediary enterprise (excluding cash) is comprised directly or indirectly of investments in the PRC, or 90% or more of its income is derived directly or indirectly from the PRC; (iii) the functions performed and risks assumed by the intermediary enterprise and any of its subsidiaries that directly or indirectly hold the PRC Taxable Properties are limited and are insufficient to prove their economic substance; and (iv) the foreign tax payable on the gain derived from the indirect transfer of the PRC Taxable Properties is lower than the potential PRC tax on the direct transfer of those assets.  On the other hand, indirect transfers falling into the scope of the safe harbors under SAT Circular 7 may not be subject to PRC tax.  The safe harbors include qualified group restructurings, public market trades and exemptions under tax treaties.

Under SAT Circular 7 and other PRC tax regulations, in the case of an indirect transfer, entities or individuals obligated to pay the transfer price to the transferor must act as withholding agents and are required to withhold the PRC tax from the transfer price.  If they fail to do so, the seller is required to report and pay the PRC tax to the PRC tax authorities. If neither party complies with the tax payment or withholding obligations under SAT Circular 7, the tax authority may impose penalties such as late payment interest on the seller.  In addition, the tax authority may also hold the withholding agents liable and impose a penalty of 50% to 300% of the unpaid tax on them.  The penalty imposed on the purchasers may be reduced or waived if the withholding agents have submitted the relevant materials in connection with the indirect transfer to the PRC tax authorities in accordance with SAT Circular 7.

On October 17, 2017, the State Administration of Taxation promulgated the Bulletin of SAT on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or Bulletin 37, which became effective on December 1, 2017, and SAT Circular 698 then was repealed with effect from December 1, 2017. Bulletin 37, among other things, simplified procedures of withholding and payment of income tax levied on non-resident enterprises. There is uncertainty as to the application of Circular 7 and Bulletin 37. We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved. Our company may be subject to filing obligations or taxed if our company is a transferor in such transactions, and may be subject to withholding obligations if our company is a transferee in such transactions under Circular 7 or Bulletin 37. We may be required to expend valuable resources to comply with Circular 7 or Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with Circular 7 and Bulletin 37, or to establish that our company should not be taxed under Circular 7 and Bulletin 37, which may have a material adverse effect on our financial condition and results of operations.

We have conducted and may conduct acquisitions or restructurings which may be governed by the aforesaid tax regulations, as well as any possible future acquisition of us.  We cannot assure you that the PRC tax authorities will not, at their discretion, impose tax return filing obligations on us or our subsidiaries, require us or our subsidiaries to co-operate an investigation by PRC tax authorities with respect to these transactions or adjust any capital gains.  Any PRC tax imposed on a transfer of our shares, or equity interests in our PRC subsidiary or any adjustment of such gains would cause us to incur additional costs and may have a negative impact on our results of operations.

Any limitation on the ability of our PRC subsidiaries to pay dividends or other distributions to us and repay their debts to creditors could limit our ability to distribute profits to our shareholders and fulfill our repayment obligations.

We are a holding company incorporated in the Cayman Islands, and we rely on dividends or other distributions paid by our PRC subsidiaries for our cash requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, to service any debt we may incur, and to pay our operating expenses.  PRC regulations currently permit payments of dividends only out of accumulated profits, as determined in accordance with the accounting standards and regulations in China, which differ in many aspects from generally accepted accounting principles in other jurisdictions.  Our PRC subsidiaries are required to allocate certain percentages of any accumulated profits after tax each year to their statutory common reserve fund as required under the PRC Company Law until the aggregate accumulated statutory common reserve funds exceed fifty percent (50%) of its registered capital.  Such reserve funds cannot be distributed as cash dividends.  In addition, if our PRC subsidiaries incur debt

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on their own or enter into certain agreements in the future, the instruments governing the debt or such other agreements may restrict their ability to pay dividends or make other distributions to us.  Therefore, these restrictions on the availability and usage of our major source of funding may materially and adversely affect our ability to pay dividends to our shareholders and to service our debts.

Our PRC subsidiaries receive substantially all of their revenue in Renminbi, which is not freely convertible into other currencies.  As a result, any restriction on currency exchange may limit the ability of our PRC subsidiaries to use their Renminbi revenues to pay dividends to us.

In response to the persistent capital outflow in China and RMB’s depreciation against U.S. dollar in the fourth quarter of 2016, the PBOC and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures over recent months, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments.  For instance, on January 26, 2017, SAFE issued the Notice of State Administration of Foreign Exchange on Improving the Review of Authenticity and Compliance to Further Promote Foreign Exchange Control, or the SAFE Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses before remitting the profits.  The PRC government may continue to strengthen its capital controls, and more restrictions and substantial vetting process may be put in place by SAFE for cross-border transactions falling under both the current account and the capital account.  Any limitation on the ability of our PRC subsidiaries to pay dividends or make other kinds of payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

China’s M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Lenders, or the M&A Rules, and other recently adopted regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex.  For example, the M&A Rules require that MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that impact or may impact national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand.  Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress on August 30, 2007 and effective as of August 1, 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by MOFCOM before they can be completed.  In addition, on February 3, 2011, the General Office of the State Council promulgated a Notice on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Lenders, or Circular 6, which officially established a security review system for mergers and acquisitions of domestic enterprises by foreign investors.  Further, on August 25, 2011, MOFCOM promulgated the Regulations on Implementation of Security Review System for the Merger and Acquisition of Domestic Enterprises by Foreign Lenders, or the MOFCOM Security Review Regulations, which became effective on September 1, 2011, to implement Circular 6.  Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises with “national security” concerns.  Under the MOFCOM Security Review Regulations, MOFCOM will focus on the substance and actual impact of the transaction when deciding whether a specific merger or acquisition is subject to security review.  If MOFCOM decides that a specific merger or acquisition is subject to security review, it will submit it to the Inter-Ministerial Panel, an authority established under the Circular 6 led by the National Development and Reform Commission, or NDRC, and MOFCOM under the leadership of the State Council, to carry out the security review.  The regulations prohibit foreign investors from bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.  There is no explicit provision or official interpretation stating that the merger or acquisition of a company engaged in the marketplace lending business requires security review.

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In the future, we may grow our business by acquiring complementary businesses.  Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from MOFCOM or its local counterparts may delay or inhibit our ability to complete such transactions.  It is unclear whether our business would be deemed to be in an industry that raises “national defense and security” or “national security” concerns.  However, MOFCOM or other government agencies may publish explanations in the future determining that our business is in an industry subject to the security review, in which case our future acquisitions in the PRC, including those by way of entering into contractual control arrangements with target entities, may be closely scrutinized or prohibited.

PRC regulations relating to offshore investment activities by PRC residents and PRC entities may limit our PRC subsidiaries’ abilities to increase their registered capital or distribute profits to us or otherwise expose us to liability and penalties under PRC law.

SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with 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.  In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.

SAFE Circular 37 was issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75.  SAFE further enacted the Notice on Further Simplifying and Improving the Foreign Exchange Management Policies for Direct Investment effective from June 1, 2015, or SAFE Circular 13, which allows PRC residents or entities to register with qualified banks in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.

If our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches or qualified banks as required by SAFE Circular 37 and other related rules, our PRC subsidiaries may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiaries.  Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.  

We have requested PRC residents whom we know hold direct or indirect interests in our company to make the necessary applications, filings and amendments as required under SAFE Circular 37 and other related rules.  However, we cannot assure you that the registration will be duly and timely completed with the local SAFE branch or qualified banks.  In addition, we may not be informed of the identities of all of the PRC residents holding direct or indirect interests in our company.  As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE regulations.  Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

Besides, outbound investments by any PRC entities may require approvals, filings or registration procedures with NDRC, MOFCOM and SAFE, or their local counterparts, which may limit PRC entities’ ability to invest in us.

Failure to comply with PRC regulations regarding the registration requirements for foreign loans may subject us to fines and other legal or administrative sanctions.

Pursuant to the Provisional Measures on Administration of Foreign Loans promulgated on January 8, 2003, the Administrative Measures on Registration of Foreign Loans effective on May 13, 2014 and its operational guidelines (collectively, the “Foreign Loan Measures”), any domestic entities shall complete the SAFE registration within 15 business days after entering into a foreign loan contract.  Any domestic entity’s failure to register foreign loans with

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SAFE may subject such entity to registration requirements, warning and a penalty of not more than RMB300,000.  However, it is not clear whether a RMB loan borrowed from non-resident individual requires registration with SAFE.  We have borrowed a loan of the RMB equivalent of US$20,000,000 from Dr. Zhengyu (Zane) Wang who holds US citizenship.  To the extent that the registration of such loan with SAFE is required, any failure to do so may result in penalties on us.

Failure to comply with PRC regulations regarding the registration requirements for employee share ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

On February 15, 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by SAFE on March 28, 2007.  Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in a stock incentive plan in an overseas publicly listed company are required to register with SAFE or its local branches and complete certain other procedures.  Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants.  Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding shares or interests and fund transfers.  In addition, the PRC agent is required to amend the SAFE registration with respect to our share incentive plans if there are any material changes to the share incentive plans, the PRC agent or the overseas entrusted institution or other material changes.  Also, Circular 37 stipulates that PRC residents who participate in a share incentive plan of an overseas unlisted special purpose company may register with SAFE before they exercise the share options.  We and our PRC employees who have been granted share options will be subject to these regulations.  Failure of our PRC share option holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute dividends to us, or otherwise materially adversely affect our business.  

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 our IPO to make loans to our PRC subsidiaries and their subsidiaries, or to make additional capital contributions to our PRC subsidiaries.

We are an offshore holding company conducting our operations in China through our PRC subsidiaries and their subsidiaries.  We may make loans or additional capital contributions to our PRC subsidiaries and their subsidiaries or we may establish new PRC subsidiaries or acquire offshore entities with business operations in China in an offshore transaction.  However, loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE and capital contributions to our PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, or FICMIS, and registration with other governmental authorities in China.  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 Qianhai Shouhang Guarantee (Shenzhen) Co., Ltd., Haidong, Shanghai CRF Financial Information Service Co., Ltd., or CRF Wealth Management Co., Ltd., which are PRC domestic companies.

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 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 banks 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

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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 issue 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 our ability to transfer any foreign currency we hold, including the net proceeds from our IPO, to our PRC subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

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 or capital contributions by us to our PRC subsidiaries.  If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we received from our IPO and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

Failure to make adequate contributions to various employee benefit plans and withhold individual income tax on employees’ salaries as required by PRC regulations may subject us to penalties.

Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. Companies operating in China are also required to withhold individual income tax on employees’ salaries based on the actual salary of each employee upon payment. If we are subject to late fees or fines in relation to the underpaid employee benefits and underwithheld individual income tax, our financial condition and results of operations may be adversely affected.

Fluctuation in the value of the RMB may have a material adverse effect on the value of your investment.

The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and China’s foreign exchange policies, among other things.  On July 21, 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB 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 RMB and the U.S. dollar remained within a narrow band.  The PRC government subsequently allowed the RMB to appreciate slowly against the U.S. dollar again, although there also have been periods when it depreciated against the U.S. dollar.  For example, in August 2015, the RMB depreciated by more than 4% against the U.S. dollar.

On November 30, 2015, the Executive Board of the International Monetary Fund, or the IMF, completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the RMB has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.  In addition, there remains significant international pressure on the PRC government to substantially liberalize its currency policy, which could result in further appreciation in the value of the RMB against the U.S. dollar.

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Our revenues and costs are mostly denominated in RMB, whereas our reporting currency is the U.S. dollar.  Any significant depreciation of the RMB may materially and adversely affect our revenues, earnings and financial position as reported in U.S. dollars.  To the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion.  Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.

Our leased property interests may be defective and our right to lease the properties affected by such defects may be challenged, which could cause significant disruption to our business.

Under PRC laws, all lease agreements are required to be registered with the local housing authorities.  We presently lease around 111 premises in China, and the landlords of these premises have not completed the registration of their ownership rights or the registration of our leases with the relevant authorities.  Failure to complete these required registrations may expose our landlords, lessors and us to potential monetary fines or may require us to relocate our offices and incur the associated losses.  In addition, for part of our leased premises, the lessors have not provided us with their ownership certificate.  If there is a third-party claim with respect to ownership of the premises, our business may be affected.

In the event of failure to use the PRC state-owned lands in accordance with the approved use, PRC land administration authorities may order the lessor to return the land use right and may impose penalties on the lessor.  Additionally, under applicable PRC laws, construction companies are required to act in accordance with the applicable land use rights.  Lessors are required to obtain approval from administrative authorities prior to changing the approved usage of a particular plot of PRC state-owned land.  With respect to our PRC leased units, the actual use of certain leased units may not be entirely consistent with the approved uses for the corresponding land.  We may be ordered by the PRC land administration authorities to return the land use right under relevant lease contracts.

The audit report included in this annual report is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit report included in this annual report filed with the U.S. Securities and Exchange Commission, or the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, is required to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards.  Because our auditor is located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditor is not currently inspected by the PCAOB.  

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality.  This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures.  As a result, investors may be deprived of the benefits of PCAOB inspections.  

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections.  Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

Proceedings instituted by the SEC against the “big four” PRC-based accounting firms, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act against the Chinese affiliates of the “big four” accounting firms (including our auditors).  The Rule 102(e) proceedings initiated by the SEC relate to these firms’ inability to produce documents, including audit work papers, in response to the request of the SEC pursuant to Section 106 of the Sarbanes-Oxley Act, as the auditors located in the PRC are not in a position lawfully to produce documents directly to the SEC because of restrictions under PRC law and specific directives issued by the China Securities Regulatory Commission, or the CSRC.  The issues raised by the proceedings are not specific to our auditors or to us, but affect equally all audit firms based in China and all China-based businesses with securities listed in the United States.

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In January 2014, the administrative judge reached an Initial Decision that the “big four” accounting firms should be barred from practicing before the SEC for six months.  Thereafter, the accounting firms filed a Petition for Review of the Initial Decision, prompting the SEC Commissioners to review the Initial Decision, determine whether there had been any violation and, if so, determine the appropriate remedy to be placed on these audit firms.

In February 2015, the Chinese affiliates of the “big four” accounting firms  each agreed to censure and pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit U.S. listed companies.  The settlement requires the firms to follow detailed procedures and to seek to provide the SEC with access to the Chinese firms’ audit documents via the CSRC.  If future document productions fail to meet the specified criteria, the SEC retains the authority to impose a variety of additional measures (e.g., imposing penalties such as suspensions, restarting the administrative proceedings, etc.).

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, and could result in delisting.  Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our shares may be adversely affected.

If our independent registered public accounting firm were denied the ability to practice before the SEC, even temporarily, and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act.  Such a determination could ultimately lead to the delisting of our ADSs from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.  

The future development of money laundering and anti-terrorism regulations in the PRC may increase our obligations to supervise and report transactions between borrowers and investors on our marketplace, thereby increasing our costs and exposing us to the risk of criminal or administrative sanctions.

PRC laws and regulations relating to money laundering and anti-terrorism have undergone considerable development over recent years.  The Guidelines and the Interim Measures require us to take effective measures to verify customer identities, monitor and report suspicious transactions and keep client information and transaction records safe.  We are also required to assist in investigations by judicial authorities and the public security bureau.  We currently rely primarily on the depository bank and third-party payment companies transferring funds on our marketplace to carry out anti-money laundering due diligence of our customers.  Current PRC laws stipulate specific obligations and steps that the banks and third-party payment companies should follow for anti-money laundering due diligence.  While the Guidelines and the Interim Measures do not stipulate explicit standards for our anti-money laundering obligations, any new requirement under money laundering laws to supervise and report transactions with our customers could have the effect of increasing our costs, and may expose us to potential criminal or administrative sanctions if we fail to comply.

In January 2016, the Standing Committee of the National People’s Congress announced the Anti-Terrorism Law of the People’s Republic of China, or the Anti-Terrorism Law.  According to this law, telecommunications operators and Internet service providers shall implement supervision systems for network security and information content as well as technical safety precautions in accordance with the relevant laws and administrative regulations to prevent the dissemination of information involving terrorism and extremism.  If such information is found, the corresponding data transmission will be immediately stopped, relevant records will be saved, relevant information will be deleted and a report shall be made to the public security organizations or related departments.  Furthermore, telecommunications, Internet, finance, accommodations, long-distance passenger transportation and motor vehicle leasing business operators and service providers shall check the identities of their customers.  No services are permitted to be provided to unidentified customers or those who refuse to comply with identification checks.  While we believe that we are in compliance with the Anti-Terrorism Law, to the extent that our operations are not in compliance, we may be exposed to potential criminal or administrative sanctions.

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The PRC Labor Contract Law, any labor shortages, increased labor costs or other factors affecting our labor force may adversely affect our business, profitability and reputation.

We engage third-party employment agencies to provide contract workers to save costs.  On December 28, 2012, the PRC Labor Contract Law was amended with effect on July 1, 2013 to impose more stringent requirements on labor dispatch.  Under such law, the number of contract workers that an employer hires may not exceed a certain percentage of its total number of employees as determined by the Ministry of Human Resources and Social Security.  Additionally, contract workers are only permitted to engage in temporary, auxiliary or substitute work.  According to the Interim Provisions on Labor Dispatch promulgated by the Ministry of Human Resources and Social Security on January 24, 2014, which became effective on March 1, 2014, the number of contract workers hired by an employer shall not exceed 10% of the total number of its employees (including both directly hired employees and dispatched contract workers).  The Interim Provisions on Labor Dispatch require an employer not in compliance with the PRC Labor Contract Law in this regard to create a plan to reduce the number of its contract workers to below 10% of the total number of its employees prior to March 1, 2016.  In addition, an employer is not permitted to hire any new contract worker until the number of its contract workers has been reduced to below 10% of the total number of its employees.

As of the date of this annual report, none of our PRC operating entities exceed the 10% cap, however some contract workers are not engaged in temporary, auxiliary or substitute provisions.  While we expect to formulate and implement a plan to engage contract workers only in temporary, auxiliary or substitute positions, we cannot assure you that we will be able to locate replacements for our contract workers on a timely basis without incurring increased labor and administrative costs.  

The application and interpretation of the new requirements under the amended Labor Contract Law are limited and uncertain.  If we are found to be in violation of the new rules regulating contract workers, we may be ordered by the labor authority to rectify the noncompliance by entering into written employment contracts with the contract workers.  Furthermore, our failure to rectify this issue within the time period specified by the labor authority, may result in us being subject to penalties ranging from RMB5,000 to RMB10,000 per contract worker.

Additionally, the economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, we are required by PRC laws and regulations 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 our employees. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased labor costs to our borrowers and investors by increasing the fees of our services, our financial condition and results of operations may be adversely affected.

We may be subject to penalties under relevant PRC laws and regulations due to failure to make full social security and housing fund contributions for some of our employees.

In the past, contributions by some of our PRC subsidiaries for some of their employees to the social security and housing funds may not have been in compliance with relevant PRC regulations.  Pursuant to the Regulation on the Administration of Housing Accumulation Funds, as amended in 2002, the relevant housing fund authority may order an enterprise to pay outstanding contributions within a prescribed time limit.  Pursuant to the PRC Social Insurance Law promulgated in 2010, the social security authority may order an enterprise to pay the outstanding contributions within a prescribed time limit, and may impose penalties if there is a failure to do so.  Although we have made what we believe to be sufficient accruals to address these risks, some of our PRC subsidiaries may be required to pay outstanding contributions and penalties to the extent they did not make full contributions to the social security and housing funds.

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Risks Related to Our ADSs

The trading price of our ADSs may be volatile, which could result in substantial losses to investors.

The trading price of our ADSs may be volatile and could fluctuate widely due to factors beyond our control.  For example, since our ADSs became listed on the NYSE on April 28, 2017, the trading price of our ADSs has ranged from US$11.43 to US$0.22 per ADS, and the last reported trading price on June 1, 2020 was US$1.32 per ADS.  This may happen because of broad market and industry factors, like the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States.  A number of Chinese companies have listed their securities on U.S. stock markets, and some of these companies have experienced significant volatility.  The trading performances of these Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States in general and consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.

In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs trade.

In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities.  If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations.  Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future.  In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

In December 2019, the Company instructed its Depositary Bank to implement a ratio change for its American Depositary Shares (“ADSs”).  The new ratio is 10 Class A ordinary shares per 1 ADS.  The effective date for the ratio change is December 3, 2019.

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If securities or industry analysts do not continue to publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.

The trading market for our ADSs is influenced by research or reports that industry or securities analysts publish about our business.  If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline.  If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to decline.  In addition, failure to meet expectations driven by analyst research or reports, even aggressive research or reports, may cause the market price of our ADSs to decline.

Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.

Sales of our ADSs in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline.  As of May 31, 2020, we had 112,252,248 Class A ordinary shares outstanding.  Among these shares, 42,385,290 Class A ordinary shares are in the form of ADSs.  All our ADSs are freely transferable without restriction or additional registration under the Securities Act of 1933, as amended, or the Securities Act.  The remaining Class A ordinary shares outstanding will be available for sale, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act.

Certain major holders of our ordinary shares may cause us to register under the Securities Act the sale of their shares.  Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration.  Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline.

Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of our ADSs for return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business.  As a result, we do not expect to pay any cash dividends in the foreseeable future.  Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has complete discretion as to whether to distribute dividends.  Our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors.  Under Cayman Islands law, dividends may be declared and paid only out of funds legally available therefor, namely out of either profits or our share premium account, provided that a dividend may not be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business.  Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors.  Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs.  There is no guarantee that our ADSs will appreciate in value or even maintain the price at which you purchased the ADSs.  You may not realize a return on your investment in our ADSs and you may even lose your entire investment.

We may be classified as a passive foreign investment company for U.S. federal income tax purposes, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our ADSs or ordinary shares.  

Depending upon the value of our assets, which is determined in part by the market value of our ADSs or ordinary shares, and the composition of our assets and income over time, we could be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes.  Based on the projected composition of our assets and income, we do not anticipate becoming a PFIC for our taxable year ending December 31, 2019.  While we do not anticipate becoming a PFIC, fluctuations in the market price of our ADSs or ordinary shares may cause us to become a PFIC for the current or any subsequent taxable year.

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A non-U.S. corporation, such as our company, will be classified as a PFIC for U.S. federal income tax purposes for any taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (determined on the basis of a quarterly average) during such year produce or are held for the production of passive income.  Whether we are a PFIC is a factual determination and we must make a separate determination each taxable year as to whether we are a PFIC (after the close of each taxable year).  Accordingly, we cannot assure you that we will not be a PFIC for our taxable year ending December 31, 2019 or any future taxable year. The determination of whether we will become a PFIC will depend, in part, on how, and how quickly, we use our liquid assets and the cash that was raised in our IPO.

If we were to be classified as a PFIC for any taxable year during which a U.S. Holder (as defined in “Item 10. Additional information—E. Taxation—U.S. Federal Income Tax Considerations”) holds an ADS or an ordinary share, such U.S. Holder would generally be subject to reporting requirements and might incur significantly increased U.S. federal income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the applicable U.S. federal income tax rules. Further, if we were to be classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally would continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our ADSs or ordinary shares even if we cease to qualify as a PFIC under the rules set forth above.  You are urged to consult your tax advisor concerning the U.S. federal income tax consequences of acquiring, holding, and disposing of ADSs or ordinary shares if we were to be classified as a PFIC. For more information see “Item 10. Additional information—E. Taxation—U.S. Federal Income Tax Considerations—PFIC Rules.”

Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

Our fourth amended and restated memorandum and articles of association contains provisions that limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions.  These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction.  For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADSs or otherwise.  Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult.  If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

Our dual-class voting structure limits your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares.  Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to 10 votes per share, subject to the limitations set forth in “Item 10. Additional Information—B. Memorandum and Articles of Association—Ordinary Shares.”  Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof.  Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.  Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into an equal number of Class A ordinary shares.

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Due to the disparate voting powers attached to these two classes of ordinary shares, the Class B  Holders own approximately 17.13% of our total issued and outstanding ordinary shares and 69.83% of the voting power of our outstanding shares as of May 31, 2020. The Class B Holders have and will continue to have decisive influence over matters requiring shareholders’ approval, including election of directors and significant corporate transactions, such as a merger or sale of our company.  This concentrated voting interest will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.

Our directors, officers and principal shareholders have substantial influence over our company.  To the extent that they align together, their interests may differ from those of our other shareholders, and they could prevent or cause a change of control or other transactions.

Certain of our directors, officers and principal shareholders hold significant amounts of our share capital and voting interests.  If and to the extent that their interests are aligned and they vote together, these parties could have significant influence in determining the outcome of any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations, election of directors and other significant corporate actions, and would also have the power to prevent or cause a change in control.  In addition, without the consent of some or all of these shareholders, we may be prevented from entering into transactions that could be beneficial to us or our minority shareholders.  The interests of our directors, officers and principal shareholders could differ from the interests of our other shareholders.  The concentration in ownership and voting power of our ordinary shares in our directors, officers and principal shareholders may cause a material decline in the value of our ADSs.  For more information regarding our principal shareholders and their affiliated entities, see “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.”

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are registered under Cayman Islands law.  

We are an exempted company limited by shares registered under the laws of the Cayman Islands.  Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2018 Revision) of the Cayman Islands and the common law of the Cayman Islands.  The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands.  The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands.  The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States.  In particular, the Cayman Islands has a less developed body of securities laws than the United States.  Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands.  In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies.  Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders (other than our memorandum and articles of association and any special resolutions passed by our shareholders).  This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as the U.S. Currently, we do not plan to rely on home country practice with respect to any corporate governance matter.  However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

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As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.  For a discussion of significant differences between the provisions of the Companies Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Item 10. Additional Information—B. Memorandum and Articles of Association—Differences in Corporate Law.”

Certain judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands company and substantially all of our assets are located outside of the United States.  Substantially all of our current operations are conducted in China.  As a result, it may be difficult or impossible for you to bring an action against us in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise.  Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets.

We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company.

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards.  However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies.  This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.

Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

We are required to file an annual report on Form 20-F within four months of the end of each fiscal year.  In addition, we have published prior to 2019, and intend to continue to publish in the future, our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the NYSE.  Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K.  However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers.  As a result, you may not be afforded the same protections or information, which would be made available to you, were you investing in a U.S. domestic issuer. In addition, if and to the extent we fail to qualify as a foreign private issuer in any future period, we would have increased disclosure and other requirements, which would increase our compliance and other costs.

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The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise any right to vote the Class A ordinary shares which are represented by your ADSs.

As a holder of our ADSs, you will only be able to direct the exercise of the voting rights attaching to the Class A ordinary shares which are represented by your ADSs in accordance with the provisions of the deposit agreement.  Under the deposit agreement, you must vote by giving voting instructions to the depositary.  Upon receipt of your voting instructions, the depositary will endeavor, insofar as practical and lawful to vote the Class A ordinary shares which are represented by your ADSs in accordance with your instructions.  You will not be able to directly exercise any right to vote with respect to the shares represented by your ADSs unless you withdraw the shares from the depositary.  Under our fourth amended and restated memorandum and articles of association, the minimum notice period required for convening a general meeting is 15 calendar days.  When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares represented by your ADSs to allow you to vote with respect to any specific resolution or matter to be considered and voted upon at such general meeting.  If we give notice to our shareholders of any general meeting, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you.  We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the shares represented by your ADSs.  In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions.  Also, as a party to the deposit agreement, you waive your right to trial by jury in any legal proceedings arising out of the deposit agreement or the ADSs against us and/or the depositary.  This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.

The depositary for our ADSs will give us a discretionary proxy to vote the Class A ordinary shares represented by your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not give proper or timely voting instructions to the depositary, the depositary will give us a discretionary proxy to vote the Class A ordinary shares represented by your ADSs at shareholders’ meetings unless:

The effect of this discretionary proxy is that if you do not give proper or timely voting instructions to the depositary as to how to vote at shareholders’ meetings, you cannot prevent the Class A ordinary shares represented by your ADSs from being voted, except under the circumstances described above.  This may make it more difficult for shareholders to influence the management of our company.  Holders of our Class A ordinary shares are not subject to this discretionary proxy.

You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them if it is illegal or impractical to make them available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on Class A ordinary shares or other deposited securities which are represented by your ADSs, after deducting its fees and expenses.  You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent.  However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs.  For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration.  The depositary may also

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determine that it is not feasible to distribute certain property through the mail.  Additionally, the value of certain distributions may be less than the cost of mailing them.  In these cases, the depositary may determine not to distribute such property.  We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions.  We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs.  This means that you may not receive distributions we make on our Class A ordinary shares or any value for them if it is illegal or impractical for us to make them available to you.  These restrictions may cause a material decline in the value of our ADSs.

You may experience dilution of your holdings due to inability to participate in rights offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities.  Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act.  The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse.  We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective.  Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary.  However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties.  The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period.  The depositary may also close its books in emergencies, or on weekends and public holidays.  The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

We incur significant costs as a result of being a public company.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the rules and regulations of the NYSE.  Being subject to these rules and regulations results in legal, accounting and financial compliance costs, makes some activities more difficult, time-consuming and costly and can also place significant strain on our personnel, systems and resources.

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We were formed in Delaware on July 12, 2004 as China Risk Finance LLC.  Prior to that, we operated through our subsidiaries, Capital Financial Co., Ltd. and Shanghai Shouhang Business Management Co., Ltd., or Shanghai Shouhang, which were established in 1997 and 2002, respectively.  Substantially all of our business activities are undertaken by our wholly owned subsidiaries organized in China.  We began our credit analytics service provider business in 2001.  We developed our proprietary, advanced technology over the past 18 years, during which our founders and management team advised many of China’s largest banks in analyzing consumer credit to issue over one hundred million credit cards to consumers.  During this time, we believe that we were China’s leading credit analytics service provider, and provided a wide range of services to China’s credit market participants, including credit analytics, underwriting strategies, modeling, credit scoring, development of marketing channels, decisioning, processing and risk management services.  We provided these services to issuers of approximately 100 million credit cards, which represented approximately half of the active credit cards issued in China at that time.  As a result, our management team acquired intimate knowledge of China’s credit market, which they used in the development of our predictive selection, credit scoring and automated decisioning technologies to address China’s unique demographics.  We believe that due to our unparalleled experience as a credit analytics service provider in China, our marketplace is among the most sophisticated and advanced in China.

In 2010, we capitalized on our 10 years of experience as a consumer credit service provider to form our marketplace lending platform to facilitate lifestyle loans.  

Thereafter, we achieved the following milestones:

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On February 11, 2015, we formed CRF China Holding Co. Limited in Hong Kong as a wholly owned subsidiary of China Risk Finance LLC.  In October and November 2015, China Risk Finance LLC completed the transfer of its entire equity interests in China Risk Finance LL (China) Co., Ltd. and CRF Finance Lease Co., Ltd. to CRF China Holding Co. Limited and China Capital Financial LLC completed the transfer of its entire equity interests in Shanghai Shouhang to CRF China Holding Co. Limited.  Such transfers have all been approved by the appropriate governmental departments.

On May 6, 2015, we formed CRF China Limited in the British Virgin Islands as a wholly owned subsidiary of China Risk Finance LLC.

On August 18, 2015 China Risk Finance LLC was converted from a Delaware limited liability company to a Cayman Islands exempted company by way of continuation, and in conjunction therewith, our name was changed to China Rapid Finance Limited.  Following our registration in the Cayman Islands on August 18, 2015, our company continued for all purposes as if originally incorporated and registered as an exempted company under and subject to the Companies Law of the Cayman Islands, the provisions of which shall apply to our company and all persons and matters associated with us as if we had been so originally incorporated and registered.

In October 2015, China Risk Finance LL (China) Co., Ltd. changed its name to “Shanghai CRF Business Management Co., Ltd.”

On April 28, 2017, our ADSs commenced trading on the NYSE under the symbol “XRF.”  In May 2017, we completed our IPO in which we sold a total of 11,500,000 of our ADSs, each representing one Class A ordinary share.  Concurrent with the completion of the IPO, our preferred shares converted to ordinary shares such that our Series A preferred shares and Series B preferred shares converted into ordinary shares on a one-for-one basis and our Series C preferred shares each converted into 4.83 ordinary shares.  In addition, concurrent with the completion of the IPO, our ordinary shares were divided into two classes—Class A ordinary shares and Class B ordinary shares.  In connection with the IPO, we received net proceeds of $63,020,000, net of underwriting discounts and commissions associated with the offering paid or payable by us.

On March 26, 2018, CRF Technology Corporation, which was originally incorporated on November 18, 2016, was converted to a California limited liability company and changed its name to CRF Technology, LLC.

On August 15, 2018, we formed Shanghai CRF Network Technology Co., Ltd., which is a wholly owned subsidiary of Shanghai CRF Business Management Co., Ltd., which was form to file an application for registration of our legacy marketplace lending platform, and did not engage in business activities.

On December 17, 2018, we dissolved and wound up Shanghai CRF E-commerce Co., Ltd.

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In the third quarter 2018, due to regulatory changes that made it cost-prohibitive, and in some ways very risky from the regulatory compliance perspective, to own and operate our legacy marketplace lending platform, we decided to cease the customer acquisition and loan facilitation at our legacy marketplace lending platform and wind up its operations.  In our transition out of the legacy marketplace lending platform, we are leveraging our proprietary technology and 18 years of experiences, establishing partnerships and facilitate financial institutions lending capital in serving the unmet consumer financial need in the emerging market.   Our business now focuses on using decision technology, work with data partners and channel partners, to help borrowers to better access consumer credit provided by financial institutions, and help them keep serving the loans including collection services.  We also provide value added services for our target borrower prospects.  For further information on our transition, see “ITEM 4. INFORMATION ON THE COMPANY.   B. Business Overview.  Business Transition”.

As part of our transition to our business of facilitating institutional lending capital, beginning in June 2019 we have been engaging in strategic cooperation and acquisition projects with several partner companies.  These partnerships help us to access certain customer segments, and we are facilitating financial institutions lending capital in serving the financial need in these customer segments.   As part of these strategic cooperation and acquisition projects, we aim to leverage our proprietary technology and 18 years of experience in consumer credit market, to help financial lending institutions to serve the need of consumer credit market in China.  On May 5, 2020, we entered into a set of agreements to acquire Yong Bao Two Ltd., which controls its variable interest entity SOS Information Technology Co., Ltd. The transaction was consummated on May 15, 2020.

Our principal executive offices are located at Room 7-705, Zhongjidasha Plaza, 819-1 Yinxianglu Road, Nanxiang Township, Jiading, Shanghai, 201802, China.   Our telephone number at this address is +86-21-3115 6909.

Legacy Marketplace Lending Platform and Our Transition  

Until April 2019, we owned and operated our legacy marketplace lending platform.  In April 2019, due to regulatory changes that made it cost-prohibitive, and in some ways very risky in regulatory compliance, to own and operate our legacy marketplace lending platform, we decided to cease the expansion of our legacy marketplace lending platform and wind up its operations.  Specifically, the PRC government’s “triple reduction” policy, which required marketplace lenders to reduce their overall lending portfolio size, reduce the total number of borrowers on their platforms and reduce the total number of investors on their platforms, made it so all marketplace lending platforms were required to either drastically reduce the size of their operations or transition out of the marketplace lending business entirely.  For more information on the “triple reduction” policy see “Item 3. Key Information—D. Key Information—Risk Factors—Risks Related to Our Legacy Marketplace Lending Business and Industry”.   We decided to leverage our robust experience as a provider of decision technology, marketing services, and portfolio management, and our experience in operating our legacy marketplace lending platform to commence our new business of facilitating institutional lending capital. For a description of the Lend Aided business, see “Item 4. Information on the Company—B. Business Overview—Business Transition.”

Ceased Matching New Loans in April 2019

In April 2019, we informed the investors on our legacy marketplace lending platform that we would no longer issue new loans on our legacy marketplace lending platform.  Since that time, we have continued to service the loans still existing on our legacy marketplace lending platform, but have not issued any new loans. Our active operations with respect to our legacy marketplace lending platform now are mainly borrower collection and lender payment operations.  We also established an exchange platform for investors to sell their loans to other investors, although we provide no guarantee that investors will be able to successfully sell their loans or the price at which they will be able to sell them to other investors.

Continue to Service Existing Borrowers and Investors  

While we are transitioning away from our legacy marketplace lending platform to our facilitating institutional lending capital model, we will continue to service the remaining loans on our legacy marketplace lending platform, including the borrowers and lenders thereto, until such loans are fully repaid. We distribute payments from borrowers on a monthly basis.

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We also established an exchange platform for investors to sell their loans to other investors, although we provide no guarantee that investors will be able to successfully sell their loans or the price at which they will be able to sell them to other investors.  

SPV Establishment for Investors  

As we began to exit the marketplace lending industry, regulatory changes and uncertainty in the marketplace lending industry generally led to above-average levels of defaults.  While we are continuing our collection efforts of delinquent loans facilitated on our legacy marketplace lending platform, we decided to assist the investors that did not receive their expected level or return on our marketplace lending platform by establishing an SPV that would allow such investors to share the value generated from our facilitating institutional lending capital cooperation relationships.  Such effort was encouraged by local PRC regulatory authorities.  

The value allocated to such investors from our legacy marketplace lending platform was reserved through a special purpose vehicle (“SPV”), Tianjin Baidayi Management Consulting Limited and a limited partnership (“LP”) structure, which was granted a warrant to purchase up to 66,402,480 of our Class A ordinary shares.  The terms of such warrant are substantially similar to the warrant granted to our cooperation partners in our business of facilitating institutional lending capital, and is exercisable upon the occurrence of certain EBITA milestones by the project company; provided, however, that the value of the warrant granted to the SPV or LP shall be reduced by the amount of any repayments and recoveries received on behalf of such investors through our collection efforts or otherwise.  The full amount of the warrant may only be exercised in the event the project company generates EBITA of $294.1 million within five years and there are no additional loan repayments or recoveries to offset this amount.  This amount may be settled in the form of cash, securities or other form of value.

Micro-credit lending Our subsidiary, Haidong, has been a registered micro credit company and principally engaging in micro-credit lending since 2013.  These micro-loans are made outside of our marketplace.  These micro-credit loans accounted for less than 1% of our total loans facilitated as of December 31, 2019.  When we began the testing phase of our new consumption loans using our predictive selection technology in the fourth quarter of 2014, Haidong initially served as the principal investor for such loans.  However, beginning July 1, 2015, Haidong no longer provided lending capital for these consumption loans.  Haidong is still providing micro credit lending services to consumers as well as small business owners.

Keep serving the borrowers and lenders

(1) Keep serving the investors

Up to April 2019, over the past ten years, the platform had a total of more than 60,000 investors with a total investment amount of 33.2 billion RMB. By May 31, 2020, these investors received a cumulative repayment of 31.4 billion RMB - principal and interest, including a repayment of 29.3 billion RMB principal, and interest income totaling 2.1 billion RMB.  The net invested capital was 1.80 billion RMB for all investors, including existing investors and those who exited, and the historical cumulative average repayment rate for all investors was 94.59%, based on the total investment amount.

By May 31, 2020,  the legacy platform had a total of 12,605 existing investor.  These investors had a total investment of 19.6 billion RMB.  These investors received a cumulative repayment of 15.6 billion RMB- principal and a cumulative interest of 1.1 billion RMB, and investor incentive payments of 15.6 million RMB, the average cumulative repayment rate of the existing investors was 86.0%, based on their total investment.

In April 2019, the legacy platform had a total investment balance amount of 4.65 billion RMB.   The existing investors received a total of 774 million RMB as monthly cash repayments during the period of April 2019 to May 2020.  As of May 2020, the existing investor balance was 3.73 billion RMB.  

As of May 2020, other than the investors who already received more than 100% return of their original investment amount, which was accounted for 123 million RMB investment balance, the total other existing investors current investment balance at the legacy platform, net of their cumulative investment return, is RMB2.51 billion.

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(2) Keep serving the lifestyle loan borrowers

The legacy platform has accumulated a total of 15.0 billion RMB lifestyle loans, as of May 2020, a cumulative repayment of 12.9 billion RMB in principal, interest and various fees, and a cumulative loan repayment rate of 85.7%.  The delinquent level,defined as 180 days or more past the due date, for the life style loan was generally between 16.0% to 20.0% as we disclosed before. As the collection efforts continues, the total loan repayment and recovery rate could be improved.

In May 2020, the outstanding balance of life stlye loan was 2.8 billion RMB owned by the existing investors.  Since the platform has completely stopped matching new loans since April 2019, and just focuses on collection operation, as the current borrowers gradually pay off their loans, the denominator of the loan portfolio gradually decreases, and the delinquent rate of the existing portfolio will continue to rise. This is a common process of any shrinking loan porfolio.  At the same time, according to the distribution of delinquent stage and the amount, it can be expected that the overall delinquent status of the existing portfolio will keep deteriorated.  Most of the lifestyle loans have a balance below 100,000 RMB, which remain as our collection focus.

(3) Keep serving  consumption loan borrowers

The legacy platform has accumulated a total of 24.1 billion RMB consumption loans, a cumulative repayment of 23.7 billion in principal, interest and various fees, and a cumulative loan repaytment rate of 98.7%. The delinquent level, defined as 90 days or more past the due date, for the consumption loan was generally between 2% to 4.5% as we disclosed before. As the collection efforts continues, the total loan repayment and recovery rate could be improved.

In May 2020, the outstanding balance of consumption loans was 1.1 billion RMB owned by the investors. Due to the short term nature of consumer loans, after the cessation of match new loans in April 2019, the current borrowers gradually paid off their loans, the delinquent rate of the existing portfolio keeps rising.   Currently, the consumption loan portfolio is basically delinquent for more than one day.  This is the situation that any winding down platform will experience in a sharp shrinkage period.

Business Transition

In April 2019, we stopped matching borrowers with individual investors, and start our transition to facilate financial institutional lending capital.    

In our transition away from the legacy marketplace lending platform business, we have ceased matching borrowers and retail investors.   We continue to use our decisioning technology, including our predictive selection technology and automated decision technology, to act as a third party service provider for financial institutions, for which we evaluate potential borrowers’ creditworthiness, provide analytical screening and marketing services, and also provide portfolio management services, including loan collection services.   We maintain and leverage our borrowers base cumulated during our legacy marketplace lending platform business to help them to get needed credit access through our instructional financials lending clients, based their demonstrated credit behavior.  

We developed our proprietary technology over 18 years through our work with some of China’s largest banks, including Bank of China and China Construction Bank, to help them develop credit scoring models and risk management systems to issue over 100 million credit cards.  Our technology enabled prospective borrowers who are overlooked by banks to access affordable and flexible digital credit through mobile devices.  Our predictive selection technology analyzed hundreds of variables based on each prospective’s online footprint, and we used this to selectively target high quality borrowers and help them to access credit offers from financial institutions.  We acquired quality borrowers through multiple channels, including social networks, online travel agencies, e-commerce platforms and payment service providers.  Applying our predictive selection technology, we efficiently selected good prospectives and “white-list” them for our platform.   We can use this same technology in our business of facilitating institutional lending capital to provide decision technology, marketing and portfolio management services to financial institutions.

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After loans are originated by our financial service clients, we accumulate borrower behavior data.  After repayment of initial loans, our automated decisioning technology determines borrower characteristics, which are mapped in a multi-dimensional matrixes, which allow our financial institution clients to manage their borrowers more effectively. Specifically, we provide repayment reminders, collection services and monitor borrowers for potential larger loans with longer durations.

We are exploring strategic alternatives such as investments, recapitalizations, mergers and acquisitions.   By working with our strategic partners, we have been forming project companies for specific customer segments since June 2019.    Our business of facilitating institutional lending capital will generate revenue and earnings from servicing fees and profit participations.  The servicing fees come from providing technology and decisioning services to institutional lending capital providers.  The profit participations will come from partnerships developed to provide decisioning and other services for specific customer segments that we are currently exploring, including SME loans, online consumption loans and auto loans as examples.  

Decision Technology  

We provide decision technology services to screen, score, and evaluate borrower prospects for financial institutions.  These services include using our predictive selection technology and automated credit decisioning technology to help financial institutions screen potential borrowers, rank them based on our proprietary credit scoring algorithms and decision engines, and then prepare a list of borrowers who meet the criteria and thresholds of our financial institution clients facilitating loans.  Our financial institution clients rely on our decision technology to obtain the creditworthiness information.  Much of this decision technology is the same as we used in our legacy marketplace lending platform, but has been adapted to meet the needs of the financial institutions for which we are acting as a fin-tech service provider.

Work with Data or Channel Partners

By collaborating with various customer channel partners and data partners, we are able to access customer segments that have been under-served by traditional financial institutions, either because lack of valid customer data, or because that are cost-prohibitive to financial service providers,   By collaborating with our partners, we leverage their data sources, customer bases, and channel distribution, such that we can help  prospective borrowers to better access credit provided by financial institutions, and help financial institutions screen and identify qualified borrower prospects.  We work with a number of customer channels and our data partners, to screen and identify the target prospects who meet our clients’ issuing criteria. This process is similar to the one we used in our legacy marketplace lending platform business, but using our clients’ criteria rather than our own.   In the operation of our legacy marketplace lending platform business, we accumulated a large database of prospectives and borrowers who demonstrated good credit behavior that are potential targets for our financial institution clients.

Beginning in June 2019, we began entering into strategic cooperation projects with partner companies operating in the institutional lending capital to form project companies that will provide fin-tech services to financial institutions so as to better enable their facilitation of make loans.   To incentivize our strategic partners to use their resources, including lending capital arrangements with financial institutions, channels and data access to target borrowers and technology in the borrower segments in which they focus, we agreed to issue to our partners a certain number of Class A Ordinary Shares upon the achievement of certain EBITA milestones by the project company.

We signed a cooperation agreement with Hongkong Outjoy Education Technology Co., Ltd on June 17, 2019, along with a share purchase agreement, and a warrant to purchase our Class A ordinary shares.   Because of the regulatory uncertainty, there have been no significant development yet since then.

Serving the Loans Issued by institutional lending capital providers

After loans are issued by a financial institution, we serve the loans, including by providing portfolio management, payment and collection services.  Our portfolio management services monitor performance indicators.   Our payment services help borrowers to work with various payment services providers to make payments based on the predefined schedules.   Our collection services include payment reminders, credit reporting data functions, and customer services centers with collection divisions.  The portfolio management services we offer are similar to those that we provided for our legacy marketplace lending platform.  As part of our portfolio management services, we establish interfaces for our institutional lender clients that enable them to track loan performance systematically and in real time in order to enable them to effectively manage their portfolios.

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Value Added Services

To capitalize on the value of our borrower base, in terms of the underlying data and trends we aggregated, through the operation of our legacy marketplace lending platform, we provided various value added services to our borrowers, such as membership services and online ecommerce services, which are not part of lending contracts between financial institutions and borrowers.  By providing value added services, we are able to access broader business opportunities, in e-commerce, online reading, entertaining and other areas.

Borrowers

Our legacy marketplace lending platform served prospective borrowers in seeking a flexible and affordable credit.  Borrowers on our marketplace generally chose our platform because of the convenience and attractive interest rates.  Our marketplace was accessible in all geographical areas of China by means of our online and mobile-based channels.  Borrowers make repayments through third-party payment companies, mobile devices or in-person (in the case of lifestyle loans).  The majority of borrowers on our marketplace typically were 23 to 31 years old with a college degree and live in large cities in China.  

After a potential borrower applies for a lifestyle loan, we conducted in-person field visits and detailed credit diligence to ensure the reliability of the information included in the application.    An applicant was automatically rejected if invalid or fraudulent information was found in his or her application.  

Investors

Our legacy marketplace enabled investors domiciled in China to invest in loans with varying principal amounts, fees and interest rates and terms.  

In April 2019, we ceased issuing loans on our legacy marketplace lending platform, stopped giving any incentives to the investors, and have the borrowers to gradually pay off their loans, and help investors to get the payments from borrowers and collect from the delinquent borrowers.  

Since April 2019, all borrower repayments with respect to a lending tranche have been distributed to the investors in such tranche on a monthly basis in proportion to their respective investments in such tranche.  

In the transition to the business of facilitationg institutional capital, and financial institutions become the lenders that service borrowers directly.

Proprietary, Advanced Technology Platform

We are a technology-driven company and our proprietary, advanced technology and know-how allow us to operate our marketplace in a way that differentiates us from all of our competitors.  Our proprietary technology has been developed and verified by the 18 years of experience serving the emerging consumer credit market in China and our eight years of owning and operating our legacy marketplace lending platform.

Our proprietary credit assessment technology assesses a potential borrower’s willingness to pay, ability to pay and stability of income.  Our proprietary credit assessment technology has three principal components—(i) predictive selection technology, (ii) credit scoring technology and (iii) automated decisioning technology.  We utilize predictive selection technology to pre-screen quality potential borrowers for smaller, shorter-term consumption loans at scale.  Our technology, which we developed over our 18 years of experience as a credit analytics service provider and marketplace operator, utilizes distinct algorithms for loans with different sizes and maturities to analyze vast amounts of data.  We continue to source data from diverse channels, including potential borrower applications, big data accessed through from our data partners and credit data created by borrowing behavior on our marketplace.  Each of our credit scoring and decisioning algorithms utilizes hundreds of variables to assess and make intelligent and rapid consumer credit decisions on a large and growing scale.  Our technology continues to evolve through machine learning as it scales to allow for more informed and intelligent decisions based on cumulative borrowing behavior data from approximately 40.7 million loans facilitated on our marketplace as of December 31, 2019.

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We developed our proprietary, advanced technology over the past 18 years, during which our founders and management team advised many of China’s largest financial institutions, including Bank of China and China Construction Bank, in analyzing consumer credit to issue credit cards over one hundred million consumers.  During this time, we were one of China’s leading analytics service providers, and provided a wide range of services to China’s credit market participants, including credit analytics, underwriting strategies, modeling, credit scoring, development of marketing channels, decisioning, processing and risk management services.  As a result, our management team has developed a profound knowledge of China’s credit market that has been integrated into our credit assessment technology, which was specifically created to address China’s unique demographics.  We believe that due to our unparalleled experience as a credit analytics service provider in China, our marketplace is among the most sophisticated and advanced in China.

The vast majority of China’s population lacks credit information.  To address this issue, we aggregate alternative sources of data, including data accessed through our data partners and from other sources.  For instance, our proprietary credit assessment technology uses data from online social media, search, browsing and transactional activity and credit data from cumulative borrowing behavior on our marketplace.  As we analyze new data from our data partners and internally produced credit from cumulative borrowing behavior on our marketplace, we continually refine our credit assessment algorithms and revise data inputs to create a more accurate measure of creditworthiness.  In addition, the data gathered in connection with the screening and due diligence is input into our credit assessment system, enhancing our credit analytical capabilities, including fraud prevention and detection.

Borrowing information concerning loans facilitated on our marketplace is not shared with the PBOC national credit bureau.  Borrowers on our platform do not have their borrowing activity on our platform show up on their credit report because PBOC credit reports only cover traditional banks.

Predictive Selection Technology

Our predictive selection technology analyzes non-traditional and unstructured data sources to accurately assess creditworthiness so we can identify and select prospective borrowers and “white-list” them.  This technology allows us to reduce our average cost of acquiring borrowers such that we are able to facilitate affordable, and accessible loan products offered by the institutional lending capital providers to our potential borrowers.  This technology contributes to our ability to decrease our customer acquisition costs, which allows us to offer affordable credit to prospective borrowers.  Our predictive selection technology also minimizes the potential for fraud on our marketplace and helps cultivate a desirable portfolio of borrowers on our platform by allowing us to proactively select our borrower composition rather than relying on potential borrowers to initiate applications for loans.    

Credit Scoring

Our credit scoring technology uses proprietary algorithms to predict the probability that a prospective borrower will repay a loan.  We employ multiple independent credit scoring algorithms depending on the loan size and term.  Each of our algorithms score potential borrowers into three principal score dimensions.  Our credit scoring algorithms are highly automated and instantaneously produce scoring decisions based on up to thousands of data variables.  Some of these variables include a potential borrower’s delinquent repayment histories, online behavior, advanced education degree, employment duration with current employer, social security status, housing benefits status, credit bureau records, real property ownership, stability of residence, duration of social media usage and online shopping frequency.  We do not assume, nor have we assumed, any liability for failing to correctly assign a credit score to a particular borrower.

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In the China market, the majority of borrowers do not have credit histories on file with the PBOC’s Central Credit Bureau, so there is no generic credit score standard similar to a FICO score in the U.S.  Therefore, we have developed our own credit scoring system in order to develop predictive models designed to segment potential borrowers into different categories.  The three principal score regions we use to arrive at an overall credit score for each borrower include the following:

The application score is used to make approval decisions, the fraud score is used to make exclusion decisions and the response score is used to determine the most efficient communication channel and the best loan offer terms to acquire the borrower.

As there is no credit standard such as FICO in China, marketplace operators such as our company have the latitude to set their own respective minimum criteria for evaluating potential borrowers.  However, as we analyze up to thousands of derived variables or data attributes obtained from various channels and data partners regarding prospective borrowers, we have not set any specific minimum criteria (other than a minimum age of 18) for considering a potential borrower.  Instead, we consider the totality of the data on a potential borrower when making a credit scoring assessment and a loan decision.

When making credit decisions, we grouped borrowers into seven application score categories based on expected ranges of default rates.  The table below represents lifetime default rate for all lifestyle loans that have reached maturity since the inception of our operations and shows both the estimated and the actual and fully realized default rates of each application score category, as well as the roughly comparable FICO scores for reference.

The actual overall default rates as of December 31, 2017, 2018 and 2019 were 20.1%, 18.8% and 22.47%, respectively.  

For consumption loans on our legacy marketplace lending platform, the annualized default rate, which is defined as any loan principal that remains delinquent for more than 90 days as a percent of total loans originated (net of consumption loans issued that could not result in such delinquency), was 2% for each of the years ended December 31, 2017,  3.2% for the year ended December 31, 2018, and 4.52% for the year ended December 31, 2019.  

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In the United States, the borrower categories of “prime” and “subprime” are characterized by a well-accepted generic credit score standard, namely the FICO score.  In China, however, there is no equivalent of the FICO score and most people do not have any credit information.  As a result, there is no broadly accepted and systematic basis to categorize borrowers into “prime” or “subprime” on a nationwide scale.  Leveraging our proprietary technology developed based on our 18 years’ experience in credit analytics in the market, we have developed our own credit score, or the CRF score, which can be used to rank potential borrowers into different score categories.  We believe that the estimated default rate and the actual observed results for each of these categories were roughly comparable to the FICO score ranges.  In this regard, Categories 1, 2 and 3 could be considered prime or near-prime under roughly comparable FICO score ranges, while score categories 6 and 7 would fall into subprime based on our test results.

Automated Decisioning Technology

Our automated decisioning technology determined if a credit product or financial service should be offered to a potential borrower, including borrowers on our legacy marketplace that were applying for new loans, as well as borrowers to whom we are helping institutional lending capital providers to facilitate loans.   We use our technology to decide if a borrower can be matched with financial service institutions’ expected risk level, expected rate of return, expected lending period and desired loan types.  Our automated decisioning technology enables us to proactively identify quality borrowers and offer them larger, longer-term loans as they demonstrate positive credit behavior, allowing us to attain significant lifetime customer value. Like our credit scoring technology, we have multiple independent credit decisioning algorithms depending on the loan size and term.  Our proprietary credit decisioning algorithms used the credit score as a factor, but not as the sole determinant as to whether a potential borrower is offered a loan.  After potential borrowers were assigned a credit score, our proprietary credit decisioning algorithms utilized inclusion criteria based on hundreds of data variables to categorize potential borrowers into groups to determine whether a particular loan could be offered to them or not.  If a borrower is offered a loan, the terms of the loan, including the principal amount, term, interest rate and fees, will depend on the credit score assessed to the potential borrower.  Individuals whose applications for lifestyle loans are denied may apply again at a later date, at which time all of their information will be re-verified.  Changes or updates to our automated decisioning technology are made at our headquarters and applied to our entire network with immediate effectiveness.

Service Agreements

Borrowers and investors that remain on our legacy marketplace lending platform are subject to multiparty service agreements with certain of our subsidiaries that act as service providers in the loan transaction.  

Borrowers make repayments of principal and interest in the form of equal monthly payments (in the case of loans with durations longer than one month).  If borrowers fail to satisfy their periodic payment obligations under the borrowing and service agreement, they are assessed an overdue service fee, which is payable before any subsequent payments of interest or principal will be credited.  

Investors bear the non-payment risk relating to the lending of their capital to borrowers.  Borrowers and investors are also subject to borrowing and service agreements among the borrower, investor and certain of our subsidiaries acting as service providers.

Our subsidiaries that are parties to the borrowing and service agreements receive transaction-based and/or maturity-based fees in exchange for their services.  See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Selected Statements of Operations Items—Revenue.”

Payment Management Services

We provide payment management services for delinquent loans on our legacy marketplace lending platform.  Since we began winding down our legacy marketplace lending platform, our payment management services have been the largest portion of our operations with respect to our legacy marketplace lending platform. Upon delinquency of a loan obligation, a member of our payment management services team will call and send a text message to the delinquent borrower to request repayment of the delinquent loan balance and all penalty and charges accrued since the date of delinquency.  If a delinquent borrower continues to not pay, our payment management services personnel will follow up with additional phone calls and text messages requesting payment.  

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Competition

Banks, consumer finance companies, micro credit companies, and trust fund companies provide various consumer credit products and services.  In addition, there are hundreds of other marketplace lending platforms that are exiting the marketplace lending industry, but we believe that very few will compete directly in the business of facilitating institutional lending capital.

We believe we do not directly compete with most of these players because, unlike the financial service providers that are focusing on the prime borrowers, we target prospective borrowers who seek smaller, shorter-term unsecured loans, and they are typically overlooked by banks. We distinguish ourselves as a service provider, focusing on using decision technology, working with data partners and channel partners, helping borrowers better access consumer credit provided by financial service institutions, and also helping them serve loans, including through the provision of collection services.  

Data Policy

We have adopted a strict internal data policy relating to the confidential information of our borrowers, investors and partners, as well as our own confidential information.  This policy establishes day-to-day data use requirements, data and information classifications, data encryption requirements, back-up requirements, approval procedures and user rights for confidential information and data.  This policy also specifies the manner in which data must be stored. We require each of our employees to agree in writing to abide by the data policy and protect the confidentiality of our data.

Intellectual Property

We regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on trademark and trade secret law and confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights. We have made applications for 30 trademarks, 6 of which are pending, and have no pending patents. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology. Monitoring unauthorized use of our technology is difficult and costly, and we cannot be certain that the steps we have taken will prevent misappropriation of our technology. From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of our resources. In addition, third parties may initiate litigation against us alleging infringement of their proprietary rights or declaring their non-infringement of our intellectual property rights. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or license the infringed or similar technology on a timely basis, our business could be harmed. Moreover, even if we are able to license the infringed or similar technology, license fees could be substantial and may adversely affect our results of operations.

Recent Developments

As disclosed on the Company’s Current Report on Form 6-K filed on May 6, 2020, the Company entered into a set of agreements on May 5, 2020 with Yong Bao Two Ltd. (“YBT”), the shareholders of YBT (the “YBT Shareholders”), eight individual investors introduced by YBT (the “Purchasers,” collectively with the YBT Shareholders, the “Investors”) and True North Financial, LLC (“True North”), (collectively, the “Parties”). The set of Agreements included the Tripartite Agreement, the Assumption Agreement and Share Purchase Agreement (collectively, the “Agreements”) and are described below.

On May 15, 2020, the transaction contemplated by the Agreements (the “Transaction”) was consummated. As a result, the Company now owns 100% of YBT, which controls its variable interest entity, SOS Information Technology Co., Ltd. (“SOS”).  

Tripartite Agreement

Pursuant to the Tripartite Agreement, the Parties entered into the Assumption Agreement and the Company, YBT and the Investors entered into the Share Purchase Agreement.  

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Assumption Agreement

Pursuant to the Assumption Agreement, the Investors agreed to assume the payment obligations under the senior secured (the “Note”) dated December 24, 2019, as amended, issued by True North to the Company promising to pay a principal sum of US$8,000,000, in exchange for the transfer and conveyance of 37,985,203 Class A ordinary shares (the “Purchased XRF Shares”) from True North to the Investors. The Company also agreed to pay US$50,000 and issue 500,000 Class A ordinary shares to True North or its designee in consideration for the assignment of the Note from True North to the Investors.

Share Purchase Agreement

Pursuant to the Share Purchase Agreement, the Investors agreed to pay off the payment obligations under the Note by delivering to the Company a combination of all of the issued and outstanding ordinary shares of YBT (the “Share Consideration”) and payment of US$1,000,000 in cash (the “Cash Consideration”) in exchange for the Company’s consent to the transfer of the Purchased XRF Shares from True North to the YBT Shareholders and issuance of 7,566,421 Class A ordinary shares and 9,806,331 Class B ordinary shares (the “True-up Shares”) and 3,465,574 Class B ordinary shares (the “New Class B Shares,” collectively with the Purchased XRF Shares and the True-up Shares, the “Shares”) to the Purchasers and the YBT Shareholders, respectively.

Amendment to Share Purchase Agreement

On May 31, 2020, the Company entered into an amendment to the Share Purchase Agreement (the “Amendment”) with YBT and the Investors to amend the definition of the True-up Shares to mean 7,566,421 Class A ordinary shares and 13,806,331 Class B ordinary shares within the Share Purchase Agreement and the Tripartite Agreement, representing an increase of 4,000,000 Class B ordinary shares that were issued to the Purchasers. Schedule A attached to the Share Purchase Agreement was updated to reflect the additional 4,000,000 Class B ordinary shares that were issued to the Purchasers. Except the terms referenced above, the remaining provisions of the Share Purchase Agreement were not affected or impaired in any manner.

As a result of the Transaction, the Investors own approximately 63.39% voting power of the Company.

The Shares were issued in reliance on exemption from registration in accordance with Regulation S and/or Rule 4(a)(2) under the Securities Act of 1933, as amended.

New Emergency Rescue Services Business

By obtaining all issued and ordinary shares of YBT, the Company gained economic control of SOS Information Technology Co., Ltd. (“SOS”), which is YBT’s operating subsidiary. Accordingly, the Company now operates in two sectors in China:  the preexisting consumer credit business and the newly acquired emergency rescue services business.

SOS provides users with emergency rescue through internet and satellite communication. SOS provides its services primarily to corporate clients who offer the services as an employee benefit.  SOS also provides its services to individual members. In total, SOS has approximately 12 million members.

The three major Software as a Service (SaaS) offerings by SOS are as follows:

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The SaaS platforms provide emergency rescue services, insurance, financial services, medical and health services, automotive services, marketing-related data, technologies and solutions in the areas of emergency rescue services such as security and mutual assistance.

SOS was established in 2016 and is headquartered in the Digital Industrial Park of Gui’an New District. In 2018, SOS became part of the first batch of emerging enterprises in Guizhou with the call center license “Type 2 Value-added Telecommunications Business License” issued by the Ministry of Industry and Information Technology. SOS currently has over 60 employees that focus on a variety of fields, including technology research and development of data, cloud computing, Internet of Things, blockchain and artificial intelligence.

Our business in China is subject to laws, regulations and judicial interpretations concerning marketplace lending, micro-lending businesses, business of facilitating institutional lending capital, illegal fundraising, unauthorized public offerings, and Internet content providers, as well as those concerning doing business in China generally.

Policy related to business transit to facilitating institutional lending capital business

On January 9, 2019, Zhejiang Bureau of China Banking and Insurance Regulatory Commission(CBIRC) issued a "Letter on Strengthening the Supervision of Internet-assisted Lending and Joint Loan Risk Prevention and Control", and in April 2019, Shanghai Financial Regulatory Department issued the Notice on Regulating the Cooperative Loan Business of Banking Financial Institutions in Shanghai and Third-Party Institutions. In October 2019, Beijing Bureau of China Banking and Insurance Regulatory Commission(CBIRC) issued the Notice on Regulating the Cooperative Business of Banks and Fintech Companies and Internet Insurance Business. In December 2019, Ningbo Bureau of China Banking and Insurance Regulatory Commission(CBIRC) issued the latest "Notice on Strengthening Risk Management of External Cooperation of Commercial Banks". On January 18, 2020, the China Banking and Insurance Regulatory Commission(CBIRC) issued a draft Interim Measures for the Administration of Commercial Internet Loans for seeking comments.

These documents have reiterated the relevant provisions on loan assistance in Circular 141, requiring banks within their jurisdiction not to outsource core links such as credit review and risk control. Lending funds shall not be provided in any form to institutions without qualifications for lending and shall not be jointly funded to issue loans with institutions without qualifications for lending. It is not allowed to accept unsecured third-party institutions to provide credit enhancement services and other forms of credit enhancement services in the form of commitments. Local Bureaus of China Banking and Insurance Regulatory Commission(CBIRC) in Zhejiang, Beijing, and Ningbo all mentioned the "principle of territoriality" in the aforementioned documents issued by them.

Regulations Related to Unauthorized Public Offerings

The PRC Securities Law stipulates that no organization or individual is permitted to issue securities for public offering without obtaining prior approval in accordance with the provisions of the law.  The following offerings are deemed the be public offerings under the PRC Securities Law:  (i) offering of securities to nonspecific targets; (ii) offering of securities to more than 200 specific targets，excluding the number of employees who have implemented the ESOP according to law; and (iii) other offerings provided by the laws and administrative regulations.  Additionally, private offerings of securities shall not be carried out through advertising, open solicitation and disguised publicity campaigns.  Uncertainties exist as to whether a transaction between one borrower and multiple investors on our marketplace would constitute a public offering.

Regulations on Intellectual Property

The PRC Trademark Law, adopted in 1982 and revised in 1993, 2001, 2013 and 2019 respectively, protects the proprietary rights to registered trademarks.  The Trademark Office under the State Administration for Industry and Commerce handles trademark registrations and may grant a term of ten years for registered trademarks, which may be extended for another ten years upon request.  Trademark license agreements shall be filed with the Trademark Office for record.  In addition, if a registered trademark is recognized as a well-known trademark, the protection of the proprietary right of the trademark holder may reach beyond the specific class of the relevant products or services.

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Policy related to legal procedures to collect

On December 26, 2019, the Supreme People's Court issued the Decision of the Supreme People's Court on Amending <Several Provisions on Evidence in Civil Procedures >, and accordingly re-published the Several Provisions on Evidence in Civil Procedures ((hereinafter to be referred as “The provisions”)). The Provisions have specified the scope of electronic data, the requirements for the parties to provide and the people's courts to investigate and collect electronic data, electronic data review judgment rules, and electronic data evidence rule system. This may facilitate the smooth progress of the company's legal collection work.

Policy related to collection

On December 1, 2017, the Office of the Leading Group on Special Rectification of Risks in Internet Finance and the National Rectification Office jointly released the Notice on Regulating and Rectifying “Cash Loan” Business, or Circular 141, which request delinquent loans shall not be collected by means of violence, intimidation, insult, defamation, or harassment. Any violation of the Circular 141 may result in penalties, including but not limited to suspension of operation, orders to make rectification, condemnation, revocation of license, be ordered to cease business operations, and even criminal liabilities.

On March 28, 2019, the National Internet Finance Association (NIFA) issued the “Self-discipline Convention for Internet Finance Debt-collection”. The document outlines a framework of debt-collection regulation in terms of discredited punishment, business management, personnel management, information management, outsourcing management, and complaints. Besides, specific provisions have been made in such areas as handling and clarifying the positive and negative lists of debt collection activities and setting up enforcement and disciplinary mechanisms.

In February 26, 2019, the Ministry of Public Security states at a news conference in Beijing that illegal loans in which exorbitant rates of interest leave borrowers in heavy debt should be considered crimes. Mafia-like gangs and "evil organizations are malignant tumors in society", according to a ministry spokesman. From April to October 2019, the Supreme People's Court, the Supreme People's Procuratorate, the Ministry of Public Security and the Ministry of Justice jointly released several documents related to cracking down on and containing criminal organizations. The documents clarified the differences between illegal loans and private lending, as well as measures to be taken against usury and "soft violence" in debt collection.

Policy related to business transition

On November 15, 2019, the Office of the Leading Group on Special Rectification of Risks in Internet Finance and the National Rectification Office jointly released the Guidance of Transformation of Online Lending Marketplace Institutions into micro-lending Companies, or Circular 83. A guidance paper is to lead P2P platforms to transform into online micro-lending companies by a regulatory imposed deadline of the end of 2021. The regulatory guidance requires companies to meet a minimum registered capital level of CNY1 billion (approaching USD150 million) to receive an online micro-lending licence to operate nationwide, which is the same requirement for national commercial banks. In addition, the initial paid-in capital must be CNY500 million and no less than one-tenth of outstanding P2P lending balances, while the remaining capital will need to be injected within six months of inception.

Currently, the PRC has not adopted any laws or regulations directly regulating independent facilitate institutional lending capital providers; however, some regulations are imposed to commercial banks for their outsourcing who may not have a good credit risk management and customer resources.

On December 1, 2017, 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 of the Regulation and Rectification of the “Cash Loan” Business (Circular No. 141). Circular No. 141 provides that banking financial institutions shall not outsource the core business of risk control to a third-party institution.

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In November 2018, Chinese Banking and Insurance Regulatory Commission (CIRC) officially released the Measures for The Administration of Online Loans for Commercial Banks (Exposure Draft). The document requires institutions which provide Lend-Aid business to Commercial Banks should provide full customer information, and the bank must responsible for credit risk control and grant credit independently. For the joint loan business, the document requires the asset providers should provide original information to the institution capital. The document also emphasized risk-control, credit check and other core banking service cannot be outsourced.

On December 19, 2018, the PRC government issued the Opinions on Classified Disposal and Risk Prevention of Online Lending Intermediaries (Circular No. 175). These opinions require "actively guide part of online lending institutional transformation for the network small loan company, credit institutions or provide borrower diversion service for licensed asset management institutions ".

In August 2019, the General Office of the State Council issued a guidelines on Promoting the Legal Norms and Healthy Development Of Platform Economy. The guidelines specifically pointed out that Setting up financial institutions, engaging in financial activities, providing financial information intermediaries and deal making services must be subject to market access management in accordance with the law. But the criteria of the market access of facilitating institutional lending capital business is not clear.

In September this year, the Zhejiang Banking and Insurance Regulatory Bureau issued “Notice on Further Regulating Issues Related to Personal Consumption Loans (Circular No. 213 [2019])”. The notice drew a red line for personal consumption loans, one of which was "no outsourcing of core business such as credit check and risk control."

In October 2019, the Beijing Banking and Insurance Regulatory Bureau issued a Notice on Regulating Cooperation Business between Banks and Fintech Companies and Internet Insurance Companies. The Notice emphasized that the unbalance of qualified lending agencies may cause risks of violation, default, moral hazard and information management.

On January 20, 2020, CIRC completed the second round of soliciting opinions concerning "Measures for The Administration of Online Loans for Commercial Banks (Exposure Draft)", which was released on 2018. In the send exposure draft, The measure subdivide a cooperation area between commercial banks and Fintech companies that the companies who provide the service of either customer acquisition, syndicated loans, risk sharing, information technology, overdue collection are defined as business partners to financial institutions including banking, insurance companies, financing guarantee companies, electric business, big data and information technology companies, and collection companies. The measure basically covers all related area of consumption finance industry. A higher threshold of cooperation between commercial banks and partners is required to set base on the measure’s request. Also, partial bundled sales, disguised guarantee and some existed cooperation model will be gradually removed, and Banks' risk appetite might lead to decline.

In addition, PRC government impose the policy of personal information usage which may increase our compliance cost. The PRC Cybersecurity Law, implemented on June 1, 2017, provides that to collect and use personal information, network operators shall follow the principles of legitimacy, rightfulness and necessity, disclose their rules of data collection and use, clearly express the purposes, means and scope of collecting and using the information, and obtain the consent of the persons whose data is gathered.

On December 29, 2017, the National Information Security Standardization Technical Committee officially issued the Information Security Technology Personal Information Security Specification, which provides the principles and security requirements to be followed in the collection, preservation, use, sharing, transfer, public disclosure and other personal information processing activities.

On May 28, 2019, the Cyberspace Administration of China, together with relevant departments, drafted the Data Security Management Measures (draft for comments), which reiterated and emphasized the three aspects of data collection. In addition, illegal access to personal information, unauthorized access to data and other acts have been criminalized.

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On December 30, 2019, the Cyberspace Administration of China, the Ministry of Industry and Information Technology, the Ministry of Public Security and the State Administration for Market Regulation jointly issued a notice of accesses to and use of personal information through APP. The notice prescribe that if there is no privacy policy or the privacy policy do not contain the collecting and using of personal information in APP, and the rules of the use of collecting and using of personal information are not be displayed obviously when the customer use the App at first time, it will be regarded as "unpublished collection and use rules".

As the business of facilitating institutional lending capital involves the collection and application of a large amount of data, increasingly strict regulatory policies in the data industry may make compliance in the operation of our business of facilitating institutional lending capital more difficult and will likely increase compliance costs.

Policy related to platform exit

The drastic shrinkage of the online lending business in 2019 is a result of tightened regulation as financial authorities, both at national and local levels, ordered marketplace lending platform to reduces their existing business scale and reduce the number of lenders and borrowers on the platforms. Those who fail to do so in time will face business shutdown. So far, no marketplace online lending platform is officially registered with regulator or obtained the business license.

On January 23, 2019, the PRC government issued the Notice on Further Implementing the Compliance Inspection and Follow-up Work of P2P Online Lending (Circular No. 1), which required that all lending platforms have to strictly follow the "triple reductions" policy, which was for all platforms, to reduce the total outstanding lending capital, reduce the total number of borrowers, and reduce the total number of investors. Several local government regulators announced that all marketplace lending platforms registered in their jurisdictions should close.

The Supreme People's court, the Supreme People's Procuratorate, the Ministry of Public Security and the Ministry of Justice issued the Notice on Several Issues Concerning the Handling of Criminal Cases of Illegal Lending, which came into force on October 21, 2019. According to this Notice, after the platform has been transformed into business of facilitating institutional lending capital, if (1) various fees, including interests, penalties and service fees charged in total would render the borrower's comprehensive cost calculated on an annualized interest rate basis in total to exceed 36%, (2) the financial institutions have operations out of the business scope licensed by regulatory authorities, and (3) other conditions of the Notice are met, there is a risk that we will be prosecuted for illegal business operations.

Policy related to credit reporting

On July 16, 2019, the State Council issued the ‘Guidance on Accelerating the Construction of Social Credit System and Constructing a New Credit-based Regulatory Mechanism’ which is to speed up the establishment of a credit-based regulatory mechanism, encouraging market entities to take good use of credit reports in a wide spectrum, especially in government procurements, bidding, administrative approvals, market access and auditing. The Guidance requires the establishment of authoritative, unified and searchable credit records of market entities in accordance with laws and regulations, and the sharing of these records in accordance with laws. According to the guidance released that the credit blocklist publishes wrongdoers’ personal details, including names and identity card numbers, of individuals and legal representatives of companies who refused to comply with court orders to shame them into compliance. And punishment to defaulters include restricting wrongdoers’ children attend schools with high tuitions that exceed standards and restricting their high consumption.

In September 2, 2019, 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 jointly issued a Notice to strengthening the construction of the P2P network credit system. The notice requests crack down on the malicious behavior of evading and abandoning debts of the marketplace online lending institutions that have ceased the marketplace lending platform business and also require increase the punishment on the dishonest people of online lending. In addition, the notice also required local offices of the Leading Group for the Special Campaign against Internet Financial Risks and of the Leading Group for the Special Campaign against Peer-to-peer Lending Risks shall organize the marketplace lending platforms within their jurisdiction to access the basic database operation institution of financial credit information, credit investigation institution and Baihang credit and other credit agencies.

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On January 2, 2020, the Superme People’s court released a guideline, which require courts to give leniency to wrongdoers on the credit blacklists and who are restricted from consumption for court order defaults with a grace period from one to three months. Credit blacklists can be public only if wrongdoers continue to default on their court orders longer that the grace period.

Policy related to legal procedures to collect

Full-time students at school, who lose their credit because of falling into illegal campus loans, is exempt from being listed on credit blacklists or restricted from purchasing certain products and services.

Court refused to enforce those private debt dispute if loans with exorbitant rates of interest that various fees, including interests, penalties and service fees charged in total would render the borrower's comprehensive cost calculated on an annualized interest rate basis in total to exceed 36%.

Regulations Related to the Legacy Marketplace Lending Industry

In July 2015, ten PRC central government ministries and regulators, including the PBOC, the CBIRC, the Ministry of Finance, the Ministry of Public Security and the Cyberspace Administration of China, together released the Guidelines, which identified the CBIRC as the supervisory regulator for the online lending industry.  According to the Guidelines, online marketplace lending platforms shall only serve as intermediaries to provide information services to borrowers and investors, and shall not provide credit enhancement services or illegally conduct fundraising.  The Guidelines also outlined certain regulatory propositions, which would require Internet finance companies, including marketplace lending platforms, to (i) complete website registration procedures with the administrative departments overseeing telecommunications; (ii) use banking financial institutions’ depository accounts to hold lending capital, and engage an independent auditor to audit such accounts and publish audit results to customers; (iii) improve the disclosure of operational and financial information, provide sufficient risk disclosure, and set up thresholds for qualified investors to provide better protections to investors; (iv) enhance online security management to protect customers’ personal and transactional information; and (v) take measures against anti-money laundering and other financial crimes. For (v), PBOC regulations also require third-party service providers to have in place appropriate anti-money laundering policies and procedures.  

Effective as of September 1, 2015, the Provisions on Private Lending Cases define private lending as financings between natural persons, legal persons or other organizations.  The Provisions set forth that private lending contracts will be upheld as valid in the absence of (i) relending of funds to a borrower that knew or should have known that the funds were fraudulently obtained from a financial institution; (ii) relending of funds to a borrower that knew or should have known that the funds were borrowed from other enterprises or raised by the company’s employees; (iii) lending of funds to a borrower wherein the investor knew or should have known that the borrower intended to use the borrowed funds for illegal or criminal purposes; (iv) violations of public orders or good morals; or (v) violations of mandatory provisions of laws or administrative regulations.  The Provisions also provide that marketplace lending platforms providing only intermediary services shall not be subject to guarantee liability.  However, if the marketplace lending platform expressly indicates lending is guaranteed on the platform, the marketplace lending platform shall be subject to liability associated with guaranteeing loans.

According to the Provisions on Private Lending Cases (i) when the interest rate agreed between the borrower and investor does not exceed an annual interest rate of 24%, the People’s Court will uphold the interest rate charged by the investor, and (ii) when the interest rate agreed between the borrower and investor exceeds an annual interest rate of 36%, the portion in excess of 36% is void and the People’s Court will uphold the borrower’s claim for return of the excess portion to the borrower.  For loans with interest rates per annum between 24% and 36%, if the interest on the loans has already been paid to the investor, and so long as such payment has not damaged the interest of the state, the community or any third parties, the courts will likely not enforce the borrower’s demand for the return of such interest payment.  If an interest rate for overdue payments is not agreed to before lending, the interest rate on overdue payments is permitted up to the interest rate for the loan.  If neither the interest rate for the loan nor the interest rate for overdue payments have been agreed to, overdue payments are permitted to have an interest rate of 6%.  In August 2017, the Supreme People’s Court promulgated the Circular of Several Suggestions on Further Strengthening the Judicial Practice Regarding Financial Cases, or Circular 22, which provides that (i) PRC courts shall uphold borrower claims to adjust or reduce the aggregate amount of interest, compound interest, default interest, liquidated damages and other fees collectively claimed by the lender in excess of an annual interest rate of

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24%, and (ii) in the context of online finance disputes, if the online lending intermediary platforms and the investors circumvent the upper limit of the judicially protected interest rate by charging intermediary fees, such fees shall be ruled as invalid.  Further, the PRC regulations prohibit online lending information intermediaries from deducting interests, commissions, management fees or margins from investors’ loan disbursements to borrowers. In August 2016, the CBIRC, the Ministry of Industry and Information Technology, or the MIIT, the Ministry of Public Security and the State Internet Information Office jointly promulgated the Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries, or the Interim Measures, which proposed the implementation of new requirements including, among others, filing, reporting, fund depository, risk and information disclosure, loan management and the permitted business scope for participants in the online marketplace lending industry.  Apart from what had already been emphasized in the Guidelines and other previously released guidance, the Interim Measures include (i) general principles; (ii) filing administration; (iii) business rules and risk management guidelines; (iv) protection measures for investors and borrowers; (v) rules on information disclosure; (vi) supervision and administrative mechanisms; and (vii) legal liabilities.

Under the general principles and filing administration sections, the Interim Measures provide that online lending intermediaries shall not engage in credit enhancement services, direct or indirect cash concentration or illegal fundraising.  The sections also stipulate a supervisory system and list the administrative responsibilities of different supervisory authorities, including the CBIRC and its local counterpart and local financial regulators.  Furthermore, these sections require online lending intermediaries to file with the local financial regulators, to apply for value-added telecommunications business licenses thereafter in accordance with the provisions of the relevant telecommunications authorities and to include serving as an Internet lending intermediary in its business scope.

Under the business rules and risk management guidelines section, the Interim Measures stipulate that online lending intermediaries shall not engage in or be commissioned to engage in thirteen prohibited activities, including:  (i) directly or indirectly financing its own projects; (ii) directly or indirectly receiving or collecting investors’ funds; (iii) directly or indirectly offering guarantees to investors or guaranteeing principal and interest payments; (iv) commissioning or authorizing a third party to advertise or promote financing projects at any physical locations other than through electronic channels such as the Internet and mobile phones; (v) providing loans (unless otherwise permitted by laws and regulations); (vi) dividing the term of financing projects; (vii) offering its own wealth management products or other financial products to raise funds or act as a proxy in the selling of banks’ wealth management products, brokers’ asset management products, funds, insurance or trust products; (viii) providing services similar to asset-based securitization services or conducting credit assignment activities in the form of asset packaging, asset securitization, asset trusts or fund shares; (ix) mixing with, bundling with or acting as a proxy in relation to investment, sales agent and brokerage services of other businesses (unless permitted by laws and regulations); (x) fabricating or exaggerating the authenticity or earnings outlook of a financing project, concealing its flaws and risks, falsely advertising or promoting a project with intentional ambiguity or other deceptive means, or spreading false or incomplete information to damage the commercial reputation of others, or to mislead investors or borrowers; (xi) providing intermediary services for loans used to invest in high-risk financing projects such as stocks, over-the-counter margin financing, futures contracts, structured products and other derivatives; (xii) operating equity-based crowd-funding; and (xiii) other activities prohibited by laws and regulations.  The Interim Measures, under the business rules and risk management section, also stipulate specific obligations or business principles of online lending intermediaries, including but not limited to online dispute resolution services, examination and verification functions, anti-fraud measures, risk education and training, information reporting, anti-money laundering, anti-terrorist financing, systems, facilities and technologies, service fees, electronic signatures and loan management.  In addition, the Interim Measures stipulate that online lending intermediaries shall not operate businesses other than risk management and necessary business processes such as information collection and confirmation, post-loan tracking and pledge management in accordance with online-lending regulations, via offline physical locations.  In the protection for investors and borrowers section, the Interim Measures require that online lending intermediaries (i) separate their own capital from funds received from investors and borrowers and (ii) select a qualified banking financial institution as their funding depository institution, which shall perform depository and administration responsibilities as required.  In the remaining sections, the Interim Measures provide for other miscellaneous requirements for online lending intermediaries, including but not limited to, risk assessment and disclosure, auditing and authentication, industry association, reporting obligations, information security and disclosure and legal liabilities.  The Interim Measures provide for a twelve-month transition period, although in practice, regulators have extended the period by which online lending intermediaries shall have rectified their non-compliance.

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Our legacy business of connecting investors and borrowers constitutes an intermediary service. The Interim Measures require online lending information intermediaries to verify the truthfulness of the information provided by or in relation to loan applicants and to actively detect fraud. Similarly, under the PRC Contract Law, an intermediary that intentionally conceals any material information or provides false information in connection with the facilitation of an intermediation contract, which results in harm to the client’s interests may not claim any fee for its intermediary services and is liable for any damage incurred by the investor.

In October 2016, several regulations on Internet finance were publicly announced, including but not limited to, the Notice of the General Office of the State Council on the Issuance of Special Rectification Implementation Plan regarding Internet Finance, Special Rectification Implementation Plan regarding Online Marketplace Lending Risks, Special Rectification Implementation Plan for Risks of Asset Management Business through the Internet and Trans-subject Business, Special Rectification Implementation Plan for Risks regarding Non-Bank Payment Institutions, Special Rectification Implementation Plan for Risks of Internet Financing Advertising and Financial Activities in the form of financial investment (together the “Special Rectification Implementation Plans”).  The Special Rectification Implementation Plans emphasize principles and rules in related to Internet financial regulations, and stipulate that (i) “look-through” supervision method shall be adopted, and (ii) companies in the same group that hold a number of financial business qualifications shall not violate rules of related party transactions and other related business regulations.

In November 2016, the CBIRC, 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.  The Guidance of Administration sets forth that online lending intermediaries are approved locally.  Under the general filing procedures for online lending intermediaries, before an filing application is submitted to local financial regulators, the online lending intermediaries may be required to:  (i) rectify any breach of applicable regulations as required by local financial regulators; and (ii) apply to the Industry and Commerce Administration Department to amend or register such entity’s the business scope.

The local financial regulators are authorized to make detailed implementation rules regarding filing procedures.  Relevant local financial regulators are in the process of making such implementation rules, which may require us to complete filing records under such future requirements within a grace period.

In February 2017, the CBIRC released the Guidance to regulate funds depositories for online lending intermediaries.  The Guidance defines depositories as commercial banks that provide online lending fund depository services, and stipulates that the depositories shall not be engaged in offering any guarantee, including:  (i) offering guarantees for lending transaction activities conducted by online lending intermediaries, or undertaking any liability for breach of contract related to such activities; (ii) offering guarantees to investors, guarantying principal and dividend payments or bearing the risks associated with fund lending operations for investors.

The Guidance also stipulates certain conditions that must be met before depositories are entitled to develop an online lending fund depository business, including:  (i) having a good credit record and not having been included on the List of Enterprises with Abnormal Operations or the List of Enterprises with Serious Illegal and Dishonest Acts; (ii) satisfying various requirements relating to the technological systems of such entity’s depository fund business and general operations, including but not limited to assuming fund administration responsibilities and not outsourcing or assigning such entity’s responsibilities to third parties to set up accounts, process trading information or verify trading passwords; and (iii) setting up special deposit accounts to hold online lending capital and sub-accounts for online investors and borrowers as well as guarantors, and in order to assure fund security, use separate accounts to hold private capital of online lending intermediaries.  In addition, the Guidance prohibits depositories from outsourcing or assigning their responsibilities to set up capital accounts, deal with transaction information, verify trading passwords and various other services to third parties, provided, however, that certain cooperation regarding payment services with third-party payment companies and depository banks is permitted in accordance with clarifications by the CBIRC.

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Apart from the requirements set forth in the Interim Measures and the Guidance of Administration, the Guidance imposes certain responsibilities on online lending intermediaries, including requiring them to enter into fund depository agreements with only one commercial bank to provide fund depository services, organize independent auditing on funds depository accounts of borrowers and investors and various other services.  The Guidance also provides that online lending intermediaries are permitted to develop an online lending fund depository business only after satisfying certain conditions, including:  (i) completing registration, filing records and obtaining a business license from the Administration of Industry and Commerce; (ii) filing records with the local financial regulator; and (iii) applying for a corresponding value-added telecommunications business license pursuant with the relevant telecommunication authorities.  The Guidance also requires online lending intermediaries to perform various obligations, and prohibits them advertising their services with the information of their depository except for in accordance with necessary exposure requirements, the interpretation and applicability of which is unclear, as well as oversight requirements.  The Guidance also raises other business standards and miscellaneous requirements for depositories and online lending intermediaries as well.  Online lending intermediaries and commercial banks conducting the online depository services prior to the effectiveness of the Guidance have a six-month grace period to rectify any activities not in compliance with the Guidance.

In addition, on April 7, 2017, the CBIRC issued the Guideline of Risk Prevention and Control of Banking Industry, which prohibits online lending intermediaries from (i) approaching potential borrowers that are incapable of repaying or (ii) offering online lending services to college students under the age of 18. In August 2017, the CBIRC released the Guidelines on Information Disclosure of the Business Activities of Online Lending Intermediaries, or the Disclosure Guidelines.  The Disclosure Guidelines further clarify the disclosure requirements for online lending intermediaries.  Pursuant to the Disclosure Guidelines, online lending intermediaries are required to disclose certain information including:  (i) filing information, organization of information, auditing information and dealing information, all of which must be publicly disclosed; (ii) basic information concerning the borrowers and loans, risk assessments of such loans and information concerning outstanding loans on the platform, all of which must be disclosed to the investors; and (iii) any event that would result in a material adverse effect to the operations of the online lending intermediary, which must be publicly disclosed within 48 hours of the event on such online intermediary’s website and other internet channels, including mobile applications, WeChat official accounts and Weibo.  The Disclosure Guidelines also require online lending service providers to record all disclosed information and retain such information for no less than five years from the disclosure date.  To the extent that online lending service providers are not in full compliance within six months of the Disclosure Guidelines, they are required to bring their operations into compliance within six months of the date the Disclosure Guidelines were issued.

In December 2017, the Office of the Leading Group on Special Rectification of Risks in Internet Finance and the National Rectification Office jointly issued the Notice on Regulating and Rectifying "Cash Loan" Business, or Circular 141, outlining general requirements for the "cash loan" business conducted by online micro-credit companies, banking financial institutions and online lending intermediaries. Circular 141 specifies features of "cash loans," which include that they do not rely on consumption scenarios and do not have a specified use of loan proceeds. Circular 141 sets forth several general requirements with respect to "cash loan" businesses, including, without limitation: (i) no organizations or individuals may conduct lending business without obtaining approvals for such business; (ii) the aggregated borrowing costs to borrowers charged by institutions in the forms of interest and fees should be annualized and subject to private lending interest rate limits set forth in the Provisions on Private Lending Cases issued by the Supreme People's Court; (iii) all relevant institutions are required to follow certain "know-your-customer" principles and prudentially assess and determine each borrower's eligibility, credit limit and cooling-off period; (iv) loans to any borrowers without income sources are prohibited; (v) all institutions with “cash loan” lending businesses are required to enhance their internal risk controls and prudentially use a "data-driven" risk management model; and (vi) institutions with “cash loan” lending businesses and their third-party collection service providers may only use lawful means of collection, and specifically shall not use illegal or inappropriate means of collection such as threats, intimidation or harassment.

In addition, Circular 141 emphasizes several requirements for online lending intermediaries. For instance, online lending intermediaries are prohibited from facilitating any loans (i) to students or other persons without sources of repayment or capacity to repay, or (ii) with no designated use of proceeds. Online lending intermediaries are not permitted to deduct the interest, handling fee, management fee or deposit from the loan principal in advance of the loan being provided to the borrower. Further, online lending intermediaries are not permitted to outsource core business functions (including, without limitation, collecting customer information, screening and selecting customers, reviewing customers’ credit, and opening customer accounts).

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Circular 141 also sets forth several requirements for banking financial institutions participating in "cash loan" businesses, including, but not limited to: (i) such banking financial institutions shall not jointly extend loans with any third-party institution that has not obtained the required lending business approvals, nor shall they fund any such institution for the purpose of extending loans in any form; (ii) with respect to loan businesses conducted in cooperation with third-party institutions, such banking financial institutions shall not outsource core business functions (including credit assessment and risk control), and shall not accept any credit enhancement services in any form (including committing to accept default risks) provided by any third-party institutions without a guarantee qualification; and (iii) such banking financial institutions must require and ensure that third-party institutions will not collect any interest or fees from borrowers.

Any violation of Circular 141 may result in penalties, including, but not limited to, suspension of operation, rectification order, condemnation, license revocation, orders to cease business operation and criminal liabilities.

On December 8, 2017, the National Rectification Office issued the Notice on Inspection Acceptance of Specific Rectification of Risk of Online Lending, or Circular 57, which provides further clarification on several matters in connection with the rectification and filing of online lending intermediaries, including, among other things:

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On December 19, 2018, the PRC government issued the Opinions on Classified Disposal and Risk Prevention of Online Lending Intermediaries (Circular No. 175). The Opinions require that the main work direction should be the withdrawal of online lending institutions except for some strictly compliant institutions in operation. At the same time, it reiterated the requirements of strict control over the fund scale and the number of investors and implementation of the "double reduction" requirements.

On January 23, 2019, the PRC government issued the Notice on Further Implementing the Compliance Inspection and Follow-up Work of P2P Online Lending (Circular No. 1), which clarified two "Triple Reductions" - The first is to ensure that the total number of P2P platforms, total business scale and number of investors in the jurisdiction achieve "Triple Reductions", and the second is to ensure that the number of investors, business scale and number of borrowers in each P2P platform achieve "Triple Reductions".

According to the policies promulgated by the central government, the local government accelerated the inspection process and published the inspection results.  In some provinces, such as Hu’nan, the local government outlawed all the online lending platforms within their jurisdiction based on the inspection result that none of the online lending platforms within their jurisdiction has passed the inspection.  On October 18, 2019, the local Financial Bureau of Shandong Province issued the "Online Lending Industry Risk Reminding Letter" on its official website. The Letter indicates that at present, no platform in Shandong Province has passed the compliance inspection. In the future, Shandong Financial Bureau will outlaw all the P2P Online lending businesses that fail to pass the compliance inspection in the whole Shandong Province. At the beginning of November, the regulatory authorities at the central government level held a meeting, which made it clear that as the next step, the focus of the regulatory authorities is to prompt the proper exit of the platforms from online lending business as the main direction. In such context, the Platform also received the oral requirement to exit the online lending industry at the formal meeting held by local Shanghai regulatory authorities.

Regulations Related to Micro-lending Businesses

One of our PRC subsidiaries, Haidong, is regulated by the Finance Office of Qinghai Province for its micro-lending business operations pursuant to the Interim Measures for the Administration of Micro-credit Companies of Qinghai Province, Several Opinions on Promoting the Healthy Development of Micro-credit Companies and other relevant regulations.  Some of the regulations applicable to Haidong include:  (i) that its business shall focus on the lending of small amounts of capital to smaller customers; (ii) that its directors, supervisors and senior managers shall be experienced and duly qualified; (iii) that it is permitted to borrow from financial institutions, but its borrowing shall not exceed its net capital funds; (iv) that it must make full information disclosures to the relevant authorities; and (v) that its reserve ratio of asset impairment must remain above 100%.  In addition, our subsidiary, Haidong, is subject to regulations applicable to micro-credit companies incorporated in Qinghai Province, which are set forth by the Finance Office of Qinghai Province.  These regulations provide that:  (i) if loans use a micro-credit company’s own capital, the interest rate and fees must be greater than 90% of the PBOC benchmark interest rate and less than four times the PBOC benchmark interest rate; and (ii) if loans use capital derived from certain financial institutions, the interest rate and fees must be greater than 90% of the PBOC benchmark interest rate and less than three times the PBOC benchmark interest rate.

On August 12, 2015, the Legislative Affairs Office of the State Council announced the Non-deposit Lending Organization Regulation (draft for comments), which requires companies, including online companies, providing inter-provincial loans to obtain prior approvals from local authorities before carrying out business operations in a certain area.

On November 21, 2017, the Office of the Leading Group on Special Rectification of Risks in Internet Finance released a notice regulating that the local regulatory authorities should suspend approval for the establishment of any online micro-credit company.

We also plan, independently or collectively with other third parties, to apply for the establishment of an online micro-credit company that would have the ability to lend directly to online micro-credit borrowers in China.  However, Circular 141 requires relevant regulatory authorities to suspend approvals of online micro-credit companies and approvals of micro-credit businesses across all provinces.  In addition, Circular 141 requires online micro-credit companies to cease funding of online micro-credit loans that are not for consumption purposes and do not have a specified use of loan proceeds.  Furthermore, Circular 141 requires online micro-credit companies to gradually reduce the volume of their existing business relating to any loans that are not in compliance with Circular 141’s terms and take certain rectification measures.  Circular 141 also prohibits online micro-credit companies from providing campus loans.  Therefore, the likelihood and timing of the approval for the establishment of such online micro-credit company is uncertain.

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Regulations Related to Business of Facilitating Institutional Lending Capital

At present, there is no regulatory body governing the business of facilitating institutional lending capital.  

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 of the Regulation and Rectification of the “Cash Loan” Business (Circular No. 141). Circular No. 141 provides that banking financial institutions shall not outsource the core business of risk control to a third party institution. However, in practice, because many financial institutions desire to enhance their online risk control capabilities, they outsource part of aspects of these functions to companies facilitating institutional lending capital. We believe that our business of facilitating institutional lending capital does not contravene the provisions of Circular No. 141.

On October 23, 2019, China Banking and Insurance Regulatory Commission issued the Notice on Printing and Distributing the Supplementary Provisions on the Supervision and Management of Financing Guarantee Companies, which provides that institutions providing customer promotion, credit evaluation and other services for various lending institutions shall not provide financing guarantee services without approval.

Regulations Related to Financing Lease

The Administrative Measures of Supervision on Financing Lease Enterprises, or the Administrative Measures, were formulated by MOFCOM and became effective on October 1, 2013.  According to the Administrative Measures, MOFCOM and the provincial-level commerce authorities are charged with the supervision and administration of financing lease enterprises.  Financing lease companies are required to report relevant data in a timely and truthful manner through the National Financing Lease Company Management Information System.  Financing lease enterprises are required to submit (i) within 15 business days after the end of each quarter, statistics regarding and a summary of its operations in the preceding quarter and the preceding year and (ii) prior to April 30 of each year, its financial and accounting report (including appended notes thereto) for the preceding year audited by an auditing firm.  Financing lease companies are required to report to the competent provincial-level commerce authority in advance of any change of name, relocation to another region, increase or decrease of registered capital, change of organizational form, adjustment of ownership structure or certain other changes.  Foreign-invested financing lease companies that undergo such changes are required to have such changes approved ahead of their effectiveness.  

Pursuant to the Circular of the General Office of the Ministry of Commerce on Strengthening and Improving the Approval and Administration over Foreign-invested Financing Lease Companies promulgated on July 11, 2013, or the Circular, foreign-invested financing lease companies that fail to conduct their substantive financing lease business operations in the previous fiscal year or failed to pass the annual inspection and had violations of laws and regulations are required to make rectifications and report the information on such rectifications to MOFCOM.  Foreign-invested financing lease companies are prohibited from engaging in deposits, loans, entrusted loans or inter-bank borrowing or equity investments unless prior approval has been granted from the relevant authorities.  The Circular prohibits foreign-invested financing lease companies from providing direct or indirect financing to local governmental financing companies that undertake a public welfare project.

The Guiding Opinions on Accelerating the Development of Financing Lease Industry, or the Guiding Opinions, were promulgated by the General Office of the State Council of the PRC on August 31, 2015. The Guiding Opinions’ main task is to accelerate the development of the financing lease industry in four aspects: system and mechanism reform, development in major fields, innovative development; and industry supervision.  According to the Guiding Opinions, (i) there is no minimum registered capital requirement for subsidiaries of a financing lease company, (i) a financing lease company is allowed to engage in a side business that is related to its main business, and (iii) private capital and independent third-party service providers are encouraged to form financing lease companies.

In April 2018, MOFCOM transferred to the CBIRC the duties to make rules on the operation and supervision of financing lease companies.

The Contract Law of the PRC, or the PRC Contract Law, promulgated by the National People’s Congress, effective October 1, 1999, regulates the civil contractual relationship among natural persons, legal persons and other organizations.  Chapter 14 of the PRC Contract Law sets forth requirements for financing lease contracts, including that financing lease contracts must be in written form and include terms such as the name, quantity, specifications, technical performance and inspection method, lease term, composition, payment term, payment method and currency and the ownership of the leased property upon expiration of the lease.  

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The lessor is not liable for injury to the body or damage to the property of a third party caused by the leased property while in the possession of the lessee.  Ownership of the leased property resides in the lessor.  If ownership upon expiration has not been stipulated to, if such stipulation is not clear, or if ownership cannot be determined in accordance with the PRC Contract Law, the ownership of the leased property shall vest in the lessor upon the expiration of the lease.    

On January 8, 2020, China banking and insurance regulatory commission(CBIRC) issued the Interim Measures for the Supervision and Management of Financial Leasing Companies (draft for comments), which required financial leasing companies to have a complete organizational structure, division of responsibility, establishment of systems, improvement of internal control, and resolution of risks. The Interim Measures stressed that the proportion of financial leasing assets should not be less than 60% of the total assets, and the financial leasing business should return to its origin.

Regulations Related to Intermediation

An intermediation contract under the PRC Contract Law 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 service fees to the intermediary.  Our legacy business practice of connecting our institutional funding partners with individual borrowers may constitute intermediary service, and our service agreements with borrowers and investors may be deemed to be 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 intentionally conceals any material fact 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 receive service fees and is liable for any damages caused.

Regulations Related to Illegal Fundraising

PRC laws and regulations prohibit persons and companies from raising funds through advertising to the public a promise to repay premium or interest payments over time through payments in cash or in kind except with the prior approval of the applicable government authorities.  Failure to comply with these laws and regulations may result in penalties imposed by the PBOC, the AIC and other governmental authorities, and can lead to civil or criminal lawsuits.

As advised by our PRC counsel, our legacy marketplace lending practice did not violate the PRC laws and regulations prohibiting illegal fundraising because our legacy marketplace only acted as a service provider in the facilitation of loans between borrowers and investors.  In such capacity, we did not raise funds or promised repayment of premium or interest obligations.  Nevertheless, uncertainties exist with respect to the PBOC, AIC and other governmental authorities’ interpretations of the fundraising-related laws and regulations.  While our agreements with investors at our legacy marketplace lending platform required investors to guarantee the legality of all funds investors put on our marketplace, we did not verify the source of investors’ funds separately, and therefore, to the extent that investors’ funds were obtained through illegal fundraising, we may be negligently liable as a facilitator of illegal fundraising.  In addition, while our loan agreements at the legacy platform contained provisions that required borrowers to use the proceeds for purposes listed in their loan applications, we did not monitor the borrowers’ use of funds on an on-going basis, and therefore, to the extent that borrowers used proceeds from the loans for illegal activities, we may be negligently liable as a facilitator of an illegal use.  Although we designed and implemented procedures to identify and eliminate instances of fraudulent conduct on our marketplace, we were not be able to identify all fraudulent conduct that may have violated illegal fundraising laws and regulations.

Regulations Related to Value-Added Telecommunication Business Certificates and Foreign Investment Restrictions

PRC regulations impose sanctions for engaging in Internet information services of a commercial nature without having obtained an ICP certificate or engaging in the operation of online data processing and transaction processing without having obtained an ODPTP certificate.  These sanctions include corrective orders and warnings from the PRC communication administration authority, fines and confiscation of illegal gains and, in the case of significant infringements, the websites involved may be ordered to close.  Nevertheless, the PRC regulatory authorities’ enforcement of such regulations in the context of marketplace lending platforms remains unclear.

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According to the Provisions on the Administration of Foreign-invested Telecommunication Enterprises, the ratio of investment by foreign investors in a foreign-invested telecommunication enterprise that engages in the operation of a value-added telecommunication business shall not exceed 50%.  Circular 196, which was promulgated on June 19, 2015, provides that foreign investors are permitted to invest up to 100% of the registered capital in a foreign-invested telecommunication enterprise engaging in the operation of online data processing and transaction processing (E-commerce).  However, foreign investors are only permitted to invest up to 50% of the registered capital in a foreign-invested telecommunication enterprise that engages in the operation of Internet information services.  Under either circumstance, the largest foreign investor will be required to have a satisfactory business track record and operational experience in the value-added telecommunications business.

While Circular 196 permits foreign ownership, in whole or in part, of online data and deal processing businesses (E-commerce), a sub-set of value-added telecommunications services, it is not clear whether our marketplace lending platform will be deemed as online data and deal processing.  See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We are required to obtain a value-added telecommunication business certificate and may be subject to foreign investment restrictions.”

Administration of mobile Internet application, or App, information services are strengthened through the Regulations for Administration of Mobile Internet Application Information Services, or the MIAIS Regulations, which became effective on August 1, 2016.  The MIAIS Regulations were enacted to regulate App, App providers (including App owners or operators) and online App stores.  Information service providers that utilize Apps are required to obtain relevant qualifications pursuant to PRC laws and regulations.

The MIAIS Regulations impose certain duties on App providers, including:  (i) verifying real identities with the registered users through mobile phone numbers; (ii) establishing and improving the mechanism for user information security protection; (iii) establishing and improving the verification and management mechanism for the information content; adopting proper sanctions and measures relating to the release of illegal information content; (iv) protecting and safeguarding users’ “rights to know and rights to choose” during installation or use; (v) respecting and protecting intellectual property rights of others; and (vi) keeping records of user log information for 60 days.

In July 2017, the MIIT promulgated the Administrative Measures on Telecommunications Business Operating Licenses.  Under these regulations, a commercial operator of value-added telecommunications services must obtain a license for value-added telecommunications business from the MIIT or its provincial-level counterparts.  Before the issuance of the Interim Measures in August 2016, there was no clear or official regulation or guidance from the PRC government as to whether marketplace lending services were a type of value-added telecommunication service or whether providers of these services are subject to value-added telecommunication regulations.  After the Interim Measures come into force, an online lending intermediary will be required to apply for the appropriate telecommunication business license.  However, the relevant implementation rules regarding such applications have not been issued.  Accordingly, we are currently not able to make the necessary application.

Regulations Related to the Internet and Mobile Apps

The Interim Measures for Administration of Internet Advertising, or the Internet Advertising Measures, were adopted by the State Administration for Industry and Commerce and became effective on September 1, 2016.  The Internet Advertising Measures regulate Internet advertising activities.  According to the Internet Advertising Measures, Internet advertisers are responsible for the authenticity of the content of advertisements.  The identity, administrative license, cited information and other certificates that advertisers are required to obtain in publishing Internet advertisements shall be true and valid.  Internet advertisements shall be distinguishable and prominently marked as “advertisements” in order to enable consumers to identify them as advertisements.  Publishing and circulating advertisements through the Internet shall not affect the normal use of the Internet by users.  It is not allowed to induce users to click on the content of advertisements by any fraudulent means, or to attach advertisements or advertising links in the emails without permission.  The Internet Advertising Measures also impose several restrictions on the forms of advertisements and activities used in advertising.  “Internet advertising” as defined in the Internet Advertising Measures refers to commercial advertisements that directly or indirectly promote goods or services through websites, web pages, Internet applications or other Internet media in various forms, including texts, pictures, audio clips and videos.  Where Internet advertisements are not identifiable and marked as “advertisements”, a fine of not more than RMB100,000 may be imposed in accordance with Advertising Law.  A fine ranging from RMB5,000 to RMB30,000 may be imposed for any failure to provide a prominently marked “CLOSE” button to ensure “one-click closure”.  Advertisers who induce users to click on the content of advertisements by fraudulent means or without permission, attach advertisements or advertising links in the emails shall be imposed a fine ranging from RMB10,000 to RMB30,000.  Our marketplace is in the process of complying with the new Internet Advertising Measures during our advertising activities.  

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The PRC government has adopted regulations governing internet access and distribution of information over the internet. Under these regulations, internet content providers and internet publishers are prohibited from posting on the internet content that, violates PRC laws and regulations, impairs the national dignity of China, contains terrorism, extremism, content of force or brutality, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the revocation of licenses to provide internet content and other licenses, the closure of the concerned websites and criminal liabilities. In the past, failure to comply with these requirements has resulted in the closure of certain websites. The website operator may also be held liable for the censored information displayed on or linked to the website.  

In particular, the Ministry of Industry and Information Technology, or the MIIT, has published regulations that place website operators with liability for content displayed on their websites and actions of users of their systems that are deemed to be socially destabilizing. The Ministry of Public Security has the authority to order any local internet service provider to block any internet website at its sole discretion. From time to time, the Ministry of Public Security has stopped the dissemination over the internet of information which it believes to be socially destabilizing. The State Secrecy Bureau is also authorized to block any website it deems to be leaking state secrets or failing to meet the relevant regulations relating to the protection of state secrets.  Furthermore, we are required to report any suspicious content to relevant governmental authorities, and to undergo computer security inspections. If we fail to implement the relevant safeguards against security breaches, our websites may be shut down and our business and ICP licenses may be revoked.

In addition to our website, we also facilitated loans through our mobile apps, which are regulated by the Regulations for Administration on Mobile Internet Applications Information Services, or the MIAIS Regulations, which are promulgated by the Cyberspace Administration of China, or the CAC, in June 2016 and became effective in August 2016. According to the MIAIS Regulations, the providers of mobile apps shall not create, copy, publish or distribute information and content that is prohibited by laws and regulations.  We have implemented internal control procedures screening the information and content on our mobile apps to ensure their compliance with the MIAIS Regulations and ISO/IEC27001:2013 Certification ("ISO 27001"), which is the international standard that describes best practices for an information security management system (ISMS).

Regulations Related to Information Security and Confidentiality of User Information

Internet activities in China are regulated and restricted by the PRC government and are subject to criminal penalties under the Decision Regarding the Protection of Internet Security.

The Ministry of Public Security has promulgated measures that prohibit use of the Internet in ways that, among other things, result in leaks of government secrets or the spread of socially destabilizing content.  The Ministry of Public Security and its local counterparts have authority to supervise and inspect domestic websites to carry out its measures.  Internet information service providers that violate these measures may have their licenses revoked and their websites shut down.

On June 22, 2007, the Ministry of Public Security, the State Secrecy Administration and other relevant authorities jointly issued the Administrative Measures for the Hierarchical Protection of Information Security, which divides information systems into five categories and requires the operators of information systems ranking above Grade II to file an application with the local Bureau of Public Security within 30 days of the date of its security protection grade determination or since its operation.  On December 28, 2016, Shanghai Information Security Testing Evaluation and Certification Center issued the Evaluation Report of Information Security, which classifies our legacy marketplace lending platform as Grade III under to the Administrative Measures for the Hierarchical Protection of Information Security.   The Ministry of Public Security orally informed us that it would not accept our application for filing.

The PRC government regulates the security and confidentiality of Internet users’ information.  The Administrative Measures on Internet Information Service, the Regulations on Technical Measures of Internet Security Protection and the Provisions on Protecting Personal Information of Telecommunication and Internet Users, which were issued on July 16, 2013 by the MIIT, set forth strict requirements to protect personal information of Internet users and require Internet information service providers to maintain adequate systems to protect the security of such information.  Personal information collected must be used only in connection with the services provided by the Internet information service provider.  Moreover, the Rules for Regulating the Order in the Market for Internet Information Service also protect Internet users’ personal information by (i) prohibiting Internet information service

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providers from unauthorized collection, disclosure or use of their users’ personal information and (ii) requiring Internet information service providers to take measures to safeguard their users’ personal information.  In December 2012, the Standing Committee of the National People’s Congress passed the Decision on Strengthening Internet Information Protection, which provides that all Internet service providers in China, including Internet information service providers, must require that their users provide identification information before entering into service agreements or providing services.

On November 7, 2016, the Standing Committee of the National People’s Congress released the Cyber Security Law, which became effective on June 1, 2017.  The Cyber Security Law requires network operators to perform certain functions related to cyber security protection and the strengthening of network information management.  For instance, under the Cyber Security Law, network operators of key information infrastructure generally shall, during their operations in the PRC, store the personal information and important data collected and produced within the territory of PRC. In addition, the Cyber Security Law requires us to take immediate remedial measures when we discover that our products or services are subject to risks, such as security defects or bugs. Such remedial measures include informing our borrowers and investors of the specific risks and reporting such risks to the relevant competent departments.

On April 11, 2017, the Cyberspace Administration of China announced the Measures for the Security Assessment of Personal Information and Important Data to be Transmitted Abroad (consultation draft), or the Consultation Draft of Security Assessment Measures.  The Consultation Draft of Security Assessment Measures requires network operators to conduct security assessments and obtain consents from owners of personal information prior to transmitting personal information and other important data abroad.  Moreover, under the Consultation Draft of Security Assessment Measures, the network operators are required to apply to the relevant regulatory authorities for security assessments under several circumstances, including but not limited to:  (i) if data to be transmitted abroad contains personal information of more than 500,000 users in aggregate; (ii) if the quantity of the data to be transmitted abroad is more than 1,000 gigabytes; (iii) if data to be transmitted abroad contains information regarding nuclear facilities, chemical biology, national defense or military projects, population and health, or relates to large-scale engineering activities, marine environment issues or sensitive geographic information; (iv) if data to be transmitted abroad contains network security information regarding system vulnerabilities or security protection of critical information infrastructure; (v) if key information infrastructure network operators transmit personal information and important data abroad; or (vi) if any other data to be transmitted abroad contains information that might affect national security or public interest and are required to be assessed as determined by the relevant regulatory authorities.

In May 2017, the Supreme People’s Court and the Supreme People’s Procuratorate released the Interpretations of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in the Handling of Criminal Cases Involving Infringement of Citizens’ Personal Information, or the Interpretations, which became effective on June 1, 2017.  The Interpretations provide conviction and sentencing criteria for infringements on citizens’ personal information.      

There has been a nationwide crackdown on illegal info abuse and illegal collection activities by violating consumer privacy. So far, Internet Society of China has conducted two councils on the collection of user personal information for mobile app. China Consumers Association also highly focus on the illegal info abuse of personal information. From August to October 2018, the Consumers Association launched the App Personal Information Protection Assessment Activity and released the Assessment Report on Personal Information Collection and Privacy Policy of 100 App which pointed out that over 90% of App has excessive collection of personal information of users. This report has stroked the society and the regulators after it was released.

On January 25, 2019, the Central Network Information Office, the Ministry of Industry and Information Technology, the Ministry of Public Security and the General Administration of Market Supervision jointly held a press conference on the Announcement for the illegal collection and use of personal information (hereinafter to be referred as “The Announcement”). According to The Announcement, the Central Network Information Office, the Ministry of Industry and Information Technology, the Ministry of Public Security and the General Administration of Market Supervision authorized the National Information Security Standardization Technical Committee, China Consumers Association, China Internet Association, and China Cyberspace Security Association to jointly establish the Special Governance Working Group to evaluate the privacy policies related to the collection and use of personal information of marketplace investors that have large numbers of users.  To the extent that the Special Governance Working Group discovers illegal activities, strict punishments may be enforced.

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On December 30, 2019, the Cyberspace Administration of China, the Ministry of Industry and Information Technology of the People's Republic of China and other four departments jointly issued the "Method for Identifying the Illegal Collection and Use of Personal Information by Apps". The Identification Method divides the illegal collection and use of personal information into six categories: (1) Failure to express the purpose, method and scope of collecting and using personal information; (2) Collection and use of personal information without user consent; (3) Violation of the principle of necessity of collection; (4) providing personal information to others without consent; failing to provide the function of deleting or correcting personal information or not publishing complaints, reporting methods required by law; (6) Collection usage rules are not disclosed.

Overall speaking, the measures taken by regulator towards illegal info abuse and illegal collection activities are long-term and involves multiple departments. Public Security will also crack down on illegal info abuse and collection activities on personal information involving criminal acts in accordance with the law. This means enterprise which are none-compliance in violating consumer privacy may face severe joint enforcement by all the four regulatory departments mentioned above.

Regulations Related to Company Establishment and Foreign Investment

The establishment, operation and management of corporate entities in China is governed by the Company Law of the PRC, or the Company Law.  According to the Company Law, companies established in the PRC are either limited liability companies or joint stock limited liability companies.  The Company Law applies to both PRC domestic companies and foreign-invested companies.  The establishment procedures, approval procedures, registered capital requirements, foreign exchange matters, accounting practices, taxation and labor matters of a wholly foreign-owned enterprise are regulated by the Wholly Foreign-owned Enterprise Law of the PRC and the Implementation Regulation of the Wholly Foreign-owned Enterprise Law.  According to these regulations, foreign-invested enterprises in the PRC may only pay dividends out of their accumulated profit, if any, determined in accordance with PRC accounting standards and regulations.  A PRC company is required to set aside general reserves of at least 10% of its after-tax profit, until the cumulative amount of such reserves reaches 50% of its registered capital unless the provisions of laws regarding foreign investment provide otherwise.  In addition, PRC companies may allocate a portion of their after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion.  These reserves and employee welfare and bonus funds are not distributable as cash dividends.  A PRC company may not distribute any profits until any losses from prior fiscal years have been offset.  Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.  

The Provisions on Guiding Foreign Investment and the 2017 revision of the Catalogue of Industries for Guiding Foreign Investment classify foreign investment projects into four categories:  encouraged projects, permitted projects, restricted projects and prohibited projects.  The purpose of these regulations is to direct foreign investment into certain priority industry sectors and restrict or prohibit investment in other sectors.  If the industry sector in which the investment is to occur falls into the encouraged category, foreign investment can be conducted through the establishment of a wholly foreign-owned enterprise.  If a restricted category, foreign investment may be conducted through the establishment of a wholly foreign-owned enterprise, provided certain requirements are met, and, in some cases, the establishment of a joint venture enterprise is required with varying minimum shareholdings for the Chinese party depending on the particular industry.  If a prohibited category, foreign investment of any kind is not allowed.  Any industry not falling into any of the encouraged, restricted or prohibited categories is classified as a permitted industry for foreign investment.  Our marketplace lending and risk management consulting businesses are classified as permitted foreign investment projects.  However, if our marketplace lending platform is required to obtain an ICP certificate (See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We are required to obtain a value-added telecommunication business certificate and may be subject to foreign investment restrictions.”), our marketplace lending business will be classified as a restricted foreign investment project, whereupon foreign investment will not be permitted to exceed 50% and the main foreign investor will be required to have a good track record and operational experience in value-added telecommunications businesses.

In January 2015, MOFCOM published the Draft Foreign Investment Law soliciting the public’s comments. The final version of Foreign Investment Law adopted by the legislature in March 2019, namely Standing committee of the National People’s Congress is quite different from the Draft Foreign Investment Law and does not address the issues related to  the VIE structure.  The final Foreign Investment Law clearly provides that when the Foreign Investment Law becomes effective, the trio of existing laws regulating foreign investment in the PRC, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and

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the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations, will be abolished.  The PRC Central Government, namely the State Council promulgated in December 2019 the Implementation Regulations of the Foreign Investment Law to replace the implementation rules and ancillary regulations of the trio laws regulating foreign investment in PRC repealed by the Foreign Investment Law.  Both the Foreign Investment Law and its Implementation Regulations became effective on January 1st, 2020.      

Regulations Related to Labor and Social Security

Pursuant to the PRC Labor Law, the PRC Labor Contract Law and the Implementing Regulations of the Employment Contracts Law, labor relationships between employers and employees must be executed in written form.  Wages may not be lower than the local minimum wage.  Employers must establish a system for labor safety and sanitation, strictly abide by state standards and provide relevant education to its employees.  Employees are also required to work in safe and sanitary conditions.

On December 28, 2012, the PRC Labor Contract Law was amended with effect on July 1, 2013 to impose more stringent requirements on labor dispatch.  Under such law, dispatched workers are entitled to pay equal to that of full-time employees for equal work, but the number of dispatched workers that an employer hires may not exceed a certain percentage of its total number of employees as determined by the Ministry of Human Resources and Social Security.  Additionally, dispatched workers are only permitted to engage in temporary, auxiliary or substitute work.  According to the Interim Provisions on Labor Dispatch promulgated by the Ministry of Human Resources and Social Security on January 24, 2014, which became effective on March 1, 2014, the number of dispatched workers hired by an employer shall not exceed 10% of the total number of its employees (including both directly hired employees and dispatched workers).  The Interim Provisions on Labor Dispatch require employers not in compliance with the PRC Labor Contract Law in this regard to reduce the number of its dispatched workers to below 10% of the total number of its employees prior to March 1, 2016.  In addition, an employer is not permitted to hire any new dispatched worker until the number of its dispatched workers has been reduced to below 10% of the total number of its employees.  As of December 31, 2018 the number of contract workers of three of our PRC operating entities exceeded the 10% cap and some of them are not engaged in temporary, auxiliary or substitutive positions.  See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC Labor Contract Law, any labor shortages, increased labor costs or other factors affecting our labor force may adversely affect our business, profitability and reputation.”

Under PRC laws, rules and regulations, including the Social Insurance Law, the Interim Regulations on the Collection and Payment of Social Security Funds and the Regulations on the Administration of Housing Accumulation Funds, employers are required to contribute, on behalf of their employees, to a number of social security funds, including funds for basic pension insurance, unemployment insurance, basic medical insurance, occupational injury insurance, maternity leave insurance and housing accumulation funds.  These payments are made to local administrative authorities and any employer who fails to contribute may be fined and ordered to pay the deficit amount.  See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may be subject to penalties under relevant PRC laws and regulations due to failure to make full social security and housing fund contributions for some of our employees.”

Regulations on Intellectual Property

The PRC has adopted legislation governing intellectual property rights, including copyrights, trademarks and patents.  The PRC is a signatory to major international conventions on intellectual property rights and is subject to the Agreement on Trade Related Aspects of Intellectual Property Rights as a result of its accession to the World Trade Organization in December 2001.

The National People’s Congress amended the Copyright Law in 2001 and 2010 to widen the scope of works and rights that are eligible for copyright protection.  The amended, the Copyright Law extends copyright protection to Internet activities, products disseminated over the Internet and software products.  In addition, there is a voluntary registration system administered by the China Copyright Protection Center.  To address copyright infringement related to content posted or transmitted over the Internet, the National Copyright Administration and former Ministry of Information Industry jointly promulgated the Administrative Measures for Copyright Protection Related to the Internet in April 2005.  These measures became effective in May 2005.

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On December 20, 2001, the State Council promulgated the new Regulations on Computer Software Protection, effective from January 1, 2002, and revised in 2013, which are intended to protect the rights and interests of the computer software copyright holders and encourage the development of software industry and information economy.  In the PRC, software developed by PRC citizens, legal persons or other organizations is automatically protected immediately after its development, without an application or approval.  Software copyrights may be registered with the designated agency and if registered, the certificate of registration issued by the software registration agency will be the primary evidence of the ownership of the copyright and other registered matters.  On February 20, 2002, the National Copyright Administration of the PRC introduced the Measures on Computer Software Copyright Registration, which outline the operational procedures for registration of software copyright, as well as registration of software copyright license and transfer contracts.  The Copyright Protection Center of China is mandated as the software registration agency.

The State Council and the National Copyright Administration have promulgated various rules and regulations and rules relating to protection of software in China, including the Regulations on Protection of Computer Software promulgated by State Council on January 30, 2013 and effective since March 1, 2013, and the Measures for Registration of Copyright of Computer Software promulgated by SARFT on February 20, 2002 and effective since the same date.  According to these rules and regulations, software owners, licensees and transferees may register their rights in software with the National Copyright Administration or its local branches and obtain software copyright registration certificates.  Although such registration is not mandatory under PRC law, software owners, licensees and transferees are encouraged to go through the registration process and registered software rights may be entitled to better protections.

The PRC Trademark Law, adopted in 1982 and revised in 1993, 2001,2013 and 2019 respectively, protects the proprietary rights to registered trademarks.  The Trademark Office under the State Administration for Industry and Commerce handles trademark registrations and may grant a term of ten years for registered trademarks, which may be extended for another ten years upon request.  Trademark license agreements shall be filed with the Trademark Office for record.  In addition, if a registered trademark is recognized as a well-known trademark, the protection of the proprietary right of the trademark holder may reach beyond the specific class of the relevant products or services.

The Patent Law of the PRC and its Implementation Rules provide for three types of patents:  invention, utility model and design.  The duration of a patent right is either 10 years or 20 years from the date of application, depending on the type of patent right.

The Administrative Measures on the Internet Domain Names was released by the MIIT on August 24, 2017, and became effective on November 1, 2017.  The Administrative Measure on the Internet Domain Names replaces the Administrative Measures on the China Internet Domain Names promulgated by the MIIT in 2004.  The Administrative Measure on the Internet Domain Names provides that the MIIT is the major regulatory authority responsible for the administration of the PRC Internet domain names, and a domain name applicant will become the domain name holder upon the completion of the application procedure.

Regulations Related to Foreign Exchange

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, which were most recently amended in August 2008.  Payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can usually be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements.  By contrast, approval from or registration with appropriate PRC authorities or banks authorized by appropriate PRC authorities is required where RMB capital is to be converted into foreign currency and remitted out of China to pay capital expenses.

SAFE promulgated Circular 19, effective on June 1, 2015, in replacement of SAFE Circular 142, Circular 59 and Circular 45.  According to Circular 19, the flow and use of the RMB capital converted from 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 or the repayment of inter-enterprise loans or the repayment of banks 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

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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 issue loans to non-associated enterprises.  Violations of SAFE Circular 19 or Circular 16 could result in administrative penalties.

From 2012, SAFE has promulgated several circulars to substantially amend and simplify the current foreign exchange procedure.  Pursuant to these circulars, the opening of various special purpose foreign exchange accounts, the reinvestment of RMB proceeds 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.  In addition, domestic companies are no longer limited to extend cross-border loans to their offshore subsidiaries but are also allowed to provide loans to their offshore parents and affiliates and multiple capital accounts for the same entity may be opened in different provinces.  SAFE also promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches.  In February 2015, SAFE promulgated SAFE Circular 13, which took effect on June 1, 2015.  SAFE Circular 13 delegates the power to enforce the foreign exchange registration in connection with inbound and outbound direct investments under relevant SAFE rules from local branches of SAFE to banks, thereby further simplifying the foreign exchange registration procedures for inbound and outbound direct investments.

On January 26, 2017, SAFE issued SAFE Circular 3, which stipulates several capital control measures with respect to the outbound remittance of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and (ii) domestic entities shall hold income to account for previous years’ losses before remitting the profits.  Moreover, pursuant to SAFE Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound investment.

Regulations Relating to Offshore Special Purpose Companies Held by PRC Residents

SAFE promulgated SAFE Circular 37 in July 2014 that requires PRC residents or entities to register with 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.  In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions.

SAFE Circular 37 was issued to replace SAFE Circular 75.  SAFE further enacted SAFE Circular 13, which allows PRC residents or entities to register with qualified banks in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.  However, remedial registration applications made by PRC residents that previously failed to comply with the SAFE Circular 37 continue to fall under the jurisdiction of the relevant local branch of SAFE.  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 distributing profits 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.

See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulations relating to offshore investment activities by PRC residents and PRC entities may limit our PRC subsidiaries’ abilities to increase their registered capital or distribute profits to us or otherwise expose us to liability and penalties under PRC law.”

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SAFE Regulations Relating to Employee Stock Incentive Plans

On February 15, 2012, SAFE promulgated the Stock Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by SAFE on March 28, 2007.  Under the Stock Option Rules and other relevant rules and regulations, PRC residents who participate in a stock incentive plan in an overseas publicly listed company are required to register with SAFE or its local branches and complete certain other procedures.  Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants.  Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, the purchase and sale of corresponding shares or interests and fund transfers.  In addition, the PRC agent is required to amend the SAFE registration with respect to our share incentive plans if there are any material changes to the share incentive plans, the PRC agent or the overseas entrusted institution or other material changes.  We and our PRC employees who have been granted incentive shares are subject to these regulations.  In addition, SAFE Circular 37 provides that PRC residents who participate in a share incentive plan of an overseas unlisted special purpose company may register with SAFE or its local branches before exercising rights.  See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Failure to comply with PRC regulations regarding the registration requirements for employee share ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.”

Regulations Related to Tax

Under the EIT Law, which became effective on January 1, 2008, an enterprise established outside the PRC with “de facto management bodies” within the PRC is considered a “resident enterprise” for PRC enterprise income tax purposes and is generally subject to a uniform 25% enterprise income tax rate on its worldwide income.  In 2009, the SAT issued SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China.  Further to SAT Circular 82, in 2011, the SAT issued SAT Bulletin 45 to provide more guidance on the implementation of SAT Circular 82.

According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be considered a PRC resident enterprise by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following conditions are met:  (a) the senior management and core management departments in charge of its daily operations function have their presence mainly in the PRC; (b) its financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (c) its major assets, accounting books, company seals, and minutes and files of its board of directors and shareholders’ meetings are located or kept in the PRC; and (d) more than half of the enterprise’s directors or senior management with voting rights habitually reside in the PRC.

Although SAT Circular 82 and SAT Bulletin 45 only apply to offshore-incorporated enterprises controlled by PRC enterprises or PRC enterprise groups and not those controlled by PRC individuals or foreigners, the determination criteria set forth therein may reflect the SAT’s general position on how the term “de facto management body” could be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises, individuals or foreigners.

The State Administration of Taxation has promulgated several rules and notices to tighten the scrutiny over acquisition transactions in recent years, including SAT Circular 698, SAT Circular 24 and SAT Circular 7.  Pursuant to these rules and notices, if a non-PRC resident enterprise transfers its equity interests in a PRC tax resident enterprise, such non-PRC resident transferor must report to the tax authorities at the place where the PRC tax resident enterprise is located and is subject to a PRC withholding tax of up to 10%.  In addition, if a non-PRC resident enterprise indirectly transfers so-called PRC Taxable Properties, referring to properties of an establishment or a place of business in China, real estate properties in China and equity investments in a PRC tax resident enterprise, by disposition of the equity interests in an overseas non-public holding company without a reasonable commercial purpose and resulting in the avoidance of PRC enterprise income tax, the transfer will be re-characterized as a direct transfer of the PRC Taxable Properties and gains derived from the transfer may be subject

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to a PRC withholding tax of up to 10%.  SAT Circular 7 has listed several factors to be taken into consideration by the tax authorities in determining if an indirect transfer has a reasonable commercial purpose.  However, regardless of these factors, an indirect transfer satisfying all the following criteria will be deemed to lack a reasonable commercial purpose and be taxable in the PRC:  (i) 75% or more of the equity value of the intermediary enterprise being transferred is derived directly or indirectly from PRC Taxable Properties; (ii) at any time during the one year period before the indirect transfer, 90% or more of the asset value of the intermediary enterprise (excluding cash) is comprised directly or indirectly of investments in the PRC, or 90% or more of its income is derived directly or indirectly from the PRC; (iii) the functions performed and risks assumed by the intermediary enterprise and any of its subsidiaries that directly or indirectly hold the PRC Taxable Properties are limited and are insufficient to prove their economic substance; and (iv) the foreign tax payable on the gain derived from the indirect transfer of the PRC Taxable Properties is lower than the potential PRC tax on the direct transfer of those assets.  On the other hand, indirect transfers falling into the scope of the safe harbors under SAT Circular 7 may not be subject to PRC tax.  The safe harbors include qualified group restructurings, public market trades and exemptions under tax treaties.

Under SAT Circular 7 and other PRC tax regulations, in the case of an indirect transfer, entities or individuals obligated to pay the transfer price to the transferor must act as withholding agents and are required to withhold the PRC tax from the transfer price.  If they fail to do so, the seller is required to report and pay the PRC tax to the PRC tax authorities.  If neither party complies with the tax payment or withholding obligations under SAT Circular 7, the tax authority may impose penalties such as late payment interest on the seller.  In addition, the tax authority may also hold the withholding agents liable and impose a penalty of 50% to 300% of the unpaid tax on them.  The penalty imposed on the purchasers may be reduced or waived if the withholding agents have submitted the relevant materials in connection with the indirect transfer to the PRC tax authorities in accordance with SAT Circular 7.

On October 17, 2017, the State Administration of Taxation promulgated the Bulletin of SAT on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or Bulletin 37, which became effective on December 1, 2017, and SAT Circular 698 then was repealed with effect from December 1, 2017. Bulletin 37, among other things, simplified procedures of withholding and payment of income tax levied on non-resident enterprises. There is uncertainty as to the application of Circular 7 and Bulletin 37.

Under the PRC Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends payable 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, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions, to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of ADSs or ordinary shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions, if such gain is regarded as income derived from sources within the PRC. If we are deemed a PRC resident enterprise, dividends paid on our ordinary shares or ADSs, and any gain realized from the transfer of our ordinary shares or ADSs, may be treated as income derived from sources within the PRC and may as a result be subject to PRC taxation. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any gain realized on the transfer of ADSs or ordinary shares by such investors may be subject to PRC tax at a current rate of 20%, subject to any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions, if such dividends or gains are deemed to be from PRC sources. If we or any of our subsidiaries established outside China are considered a PRC resident enterprise, it is unclear whether holders of our ADSs or ordinary shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas.

Regulations Related to Mergers and Acquisitions

On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the M&A Rules, which became effective on September 8, 2006 and were amended on June 22, 2009.  The M&A Rules, among other things, require offshore special purpose vehicles formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC domestic enterprises or individuals to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.  On September 21, 2006, the CSRC published a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval.  Based on the advice we received from our PRC counsel, we are not required to obtain approval from the CSRC for the listing and trading of our ADSs on the NYSE.  

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The M&A Rules, and other recently adopted regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex.  For example, the M&A Rules require that MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that impact or may impact national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand.  Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress on August 30, 2007 and effective as of August 1, 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by MOFCOM before they can be completed.  In addition, on February 3, 2011, the General Office of the State Council promulgated Circular 6, which officially established a security review system for mergers and acquisitions of domestic enterprises by foreign investors.  Further, on August 25, 2011, MOFCOM promulgated the MOFCOM Security Review Regulations, which became effective on September 1, 2011, to implement Circular 6.  Under Circular 6, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises with “national security” concerns.  Under the MOFCOM Security Review Regulations, MOFCOM will focus on the substance and actual impact of the transaction when deciding whether a specific merger or acquisition is subject to security review.  If MOFCOM decides that a specific merger or acquisition is subject to security review, it will submit it to the Inter-Ministerial Panel, an authority established under the Circular 6 led by the NDRC and MOFCOM under the leadership of the State Council, to carry out the security review.  The regulations prohibit foreign investors from bypassing the security review by structuring transactions through trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.  There is no explicit provision or official interpretation stating that the merger or acquisition of a company engaged in the marketplace lending business requires security review.

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The following diagram illustrates our corporate structure as of the date of this report, including our subsidiaries:

Our headquarters are located in Shanghai.  We have leased an aggregate of approximately 35,825.63 square feet of office space throught China as of December 31,2019. Our Shanghai headquarter has office spaces of  25,555.86 square feet,. Rest service centers in other provinces total 10,269.77 square feet, with lease terms from one to three years.  We believe that we will be able to obtain adequate facilities, principally through leasing, to accommodate our future expansion plans

None.

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None.

Until April 2019, we owned and operated our legacy marketplace lending platform. In April 2019, due to regulatory changes that made it cost-prohibitive, and in some ways contrary to the new regulations, to own and operate our legacy marketplace lending platform, we decided to cease the expansion of our legacy marketplace lending platform and wind up its operations. We decided to leverage our robust experience as a credit analytics service provider and our experience in operating our legacy marketplace lending platform to commence our business of facilitating institutional lending capital. For a description of the business of facilitating institutional lending capital, see “Item 4. Information on the Company—B. Business Overview— Business Transition”.  The information contained in this Item 5 relates to our legacy marketplace lending platform.  As we ceased facilitating loans on our legacy marketplace lending platform in April 2019, and are in the process of transitioning to our new business, our future financial results will differ from those presented herein and our historical financial results.

Our legacy marketplace lending platform offered flexible products to serve the lifetime credit needs of EMMAs.  Our consumption loans are loans with terms of between two weeks to twelve months, which have principal amounts generally in the range of RMB500 (approximately US$70) to RMB6,000 (approximately US$845).  Our lifestyle loans are loans with terms of between one to three years, which have principal amounts generally in the range of RMB6,000 (approximately US$845) to RMB200,000 (approximately US$28,169).

Our legacy marketplace lending platform generated, and will continue to generate as long as loans remain on our legacy marketplace lending platform, revenues primarily from transaction fees and service fees paid by borrowers and investors on our marketplace.  We did not assume credit risk for the loans facilitated on our marketplace.

The customer acquisition cost for consumption loans on an average per borrower basis was approximately US$17, US$14 and US$14 in 2017, 2018 and 2019.  Under U.S. GAAP, these customer acquisition incentives were netted from our transaction and service fees.  

Our gross billings on transaction and service fees were US$49.4 million in 2019, and decreased, from US$120.9 million in 2018 by US$71.5 million.  We had net loss of US$ 36.6 million, US$ 66.5 million and US$ 9.9 million in 2017, 2018 and 2019, respectively.

Our financial statements are prepared on the basis that we will continue as a going concern. We have suffered substantial losses from operations in previous years, have a working capital deficiency, and have stated that substantial doubt exists about our ability to continue as a going concern.

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Key Operating and Financial 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 table below.

Key Factors Affecting Our Results

We believe the key factors affecting our financial condition and results of operations include the following:

Demand for Consumer Credit in China

The effectiveness of our business is largely dependent on the demand for consumer credit in China and our ability to help a large number of potential borrowers to access credit provided by financial institutions.  We intend to facilitate financial institutions lending of capital to qualified prospective borrowers in a cost-effective manner.  According to the PBOC, as of December 31, 2015, approximately 75% of China’s consumers did not have a credit history. We believe this is because banks in China do not have a cost-effective way to lend to prospective borrowers due to the absence of credit data, the costs associated with data collection and the inability of banks to engage in variable pricing to deal with delinquency levels of near prime borrowers.  Our proprietary technology creates the significant advantage of a highly scalable borrower acquisition mechanism for accessing these underserved prospective borrowers.  Through our large borrower base with tens of millions borrowers with demonstrated good credit behavior, we can help financial institutions to offer them larger, longer-term loans, such that we could retain these good prospective borrowers with significant lifetime customer value.  We believe our ability to attract and retain a large number of quality borrowers, to help them better access credit at a lower cost, and help financial service providers and institutional lending capital providers to meet borrowers’ growing credit needs, differentiates us from our competitors in the Chinese consumer credit market.

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PRC Regulatory Environment

The regulatory environment for the consumer lending industry in China is evolving and creating opportunities that could affect our results of operations.  Paticularly, the regulatory policies regarding the online lending industry, which will have material impact on our existing the legacy online lending platform business, and as well the regulatory policies regarding facilitating instutional lending business, which will define our transition into the new business direction.  Most recently, multiple PRC governmental authorities have published and promulgated various new laws and rules to further regulate the marketplace lending industry in China.  See “Item 4. Information on the Company— B. Business Overview—Regulation.”  We have closely tracked the development and implementation of new rules and regulations as we wind down our legacy marketplace lending platform business and transition into the new business.  These requirements have created entry barriers for many consumer lending service providers, lending facilitators in China included, and further differentiated us from our competitors.  We will continue to ensure timely comply with new rules.   We expect that our operations will need to be further modified to comply with relevant PRC laws and regulations on consumer lending as the regulatory regime for this sector continues to evolve.  See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Some aspects of our operations need to be modified to comply with existing and future requirements set forth by the CBIRC or laws or regulations promulgated by other PRC authorities regulating the marketplace lending industry in China.”  Such compliance may increase our operating costs.

In April 2019, we ceased issuing new loans and announced our transition to the business of facilitating institutional lending of capital, which were driven by the regulatory requirements to shut down the online lending marketplace platform business in China.   And our transition into the new business model to facilicating the institutional lending capital is also regulated by the same regulators.  

Effectiveness of Our Proprietary Credit Assessment Technology

We are a technology-driven company, and we have made and will continue to make substantial investment in research and development of proprietary and innovative technology and know-how to operate our marketplace.  Leveraging our 20 years history of creating credit solutions for Chinese financial institutions and over 10 years of “test and learn” experience in facilitating consumer credit, we have developed proprietary predictive selection technology that addresses credit data limitations in China.  We utilize predictive selection technology to pre-screen potential borrowers for consumption loans.  We evaluate our proprietary credit assessment technology on a regular basis and leverage the additional data on loan history experience, borrower behavior, economic factors and prepayment trends that we accumulate to continually improve our technology.  Our business development and financial performance will continue to be dependent on our ability to effectively evaluate potential borrowers’ credit profiles and forecast default rates.  For the years ended December 31, 2017, 2018 and 2019, we spent US$8.4 million, US$9.1 million and US$4.6 million, respectively, on research and development activities.

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Selected Statements of Operations Items

Revenue

The table below sets forth the breakdown our revenue for the periods indicated:

Our legacy marketplace lending platform generated revenue primarily from transaction and service fees by providing lending-related services on our marketplace.  Our services included (i) loan matching services through which we matched investors to borrowers on our marketplace and facilitated the execution of loan agreements between the investor and the borrower; (ii) loan repayment services through which we assisted investors in collecting loan payment from borrowers.  Prior to approving potential borrowers for lifestyle loans, we verified data submitted by the borrower, including his or her name, age, residential address, government identification number, place of employment, bank account information and other information.

We categorized the vast majority of loans facilitated on our legacy marketplace lending platform as either consumption loans or lifestyle loans.  Consumption loans were loans with maturities between two weeks and three months, which had principal amounts generally in the range of RMB500 (approximately US$70) to RMB6,000 (approximately US$845).  Consumption loans were made either using our proprietary predictive selection technology or based on the historical repayment records and other behavior of borrowers on our marketplace.  Our lifestyle loans were loans with terms of between one to three years, the principal amounts from between RMB6,000 (approximately US$845) to RMB200,000 (approximately US$28,169).  Borrowers of loans with principal amounts greater than RMB6,000 (approximately US$845) were required to submit their data for verification prior to the loan being issued.  Other than consumption and lifestyle loans, certain loans were sourced from our micro-lending operations by our subsidiary, Haidong. Such loans accounted for less than 1% of the total loans facilitated on our marketplace as of December 31, 2019.   Set forth below is a table showing the interest rates and transaction fee rates of each type of loan.