——Preface——

In order to further promote a rational investment culture and effectively protect the legitimate rights and interests of investors, the China Securities Regulatory Commission (CSRC) has established May 15th of each year as "National Investor Protection Publicity Day." On this day, the CSRC mobilizes all parties nationwide to actively carry out various investor protection activities, aiming to deepen the understanding of investor protection concepts and make it a conscious action for everyone.

  2023 As the annual "5.15 National Investor Protection Publicity Day" approaches, with the theme of "Caring for Investors, Working Together," this issue will focus on sharing investor knowledge about "off-exchange financing (field financing).

——Understanding "Off-Exchange Financing"——

——(1) What is Off-Exchange Financing?

"Off-exchange financing" refers to activities where institutions or individuals outside of securities companies, lacking the qualifications for securities financing business, lend funds to investors. These investors then use the borrowed funds and margin to trade stocks in specific securities accounts, with the lenders charging interest, fees, or a share of the profits.

——(2) Typical Cases of Off-Exchange Financing

Case 1: Wu's Case of Illegal Business Operation (Off-exchange financing using the account lending model)

——Basic Case Details——

  2019 Starting in October 2019, Wu operated Guangdong Yisheng Information Technology Consulting Co., Ltd. (hereinafter referred to as Yisheng Company), developing the Yisheng.com platform. This platform used the accounts of securities company clients to provide financing services to stock traders. Stock traders registered as members on Yisheng.com and transferred "margin" to the bank account designated by Yisheng Company. Yisheng Company provided stock traders with financing funds ranging from 1 to 10 times the "margin" amount, charging interest and transaction fees based on "daily strategy, interest-free strategy, and monthly strategy" methods, thereby profiting. From November 2019 to March 2020, Yisheng Company collected approximately 38,114,831 yuan in funds from stock traders under the guise of "margin."

——Court Ruling——

The court found that the defendant, Wu, violated national regulations by engaging in securities business without approval from the relevant national authorities, disrupting market order, and the circumstances were particularly serious. His actions constituted the crime of illegal business operation. Therefore, the court sentenced the defendant, Wu, to three years and six months imprisonment and a fine of 300,000 yuan.

First Instance Case Number: (2020) Yue0605Xingchu3368

Case 2: Lin, Jiang, Lai, and Du's Case of Illegal Business Operation (Off-exchange financing using the system sub-account model)

——Basic Case Details——

  2018 Starting in October 2019, the defendant Lin, as the actual controller of Fujian Wanqian Hengye Investment Co., Ltd. (hereinafter referred to as Wanqian Hengye Company), and the defendants Jiang, Lai, and Du, as the general managers of various business departments, used the "Zhangguobao APP" to provide clients with stock trading accounts (sub-accounts). Clients traded stocks through sub-accounts on the "Zhangguobao APP," with Wanqian Hengye Company's master account opened with a securities firm synchronizing transactions on the stock exchange in real-time. At the same time, Wanqian Hengye Company provided clients with financing funds with leverage of 3 to 8 times their principal, charging interest based on the financing amount. Wanqian Hengye Company profited by earning interest and commission differences.

——Court Ruling——

The court found that the defendants Lin, Lai, Jiang, and Du engaged in securities business without approval from the relevant national authorities, disrupting market order, and the circumstances were particularly serious, all constituting the crime of illegal business operation. The defendant Lin played a major role in the joint crime and was the principal offender; the defendants Lai, Du, and Jiang played secondary and auxiliary roles in the joint crime and were accomplices, and could be given lighter or reduced punishment according to law. Therefore, the court sentenced the defendant Lin to six years imprisonment and a fine of 1.38 million yuan; the defendant Lai to one year and nine months imprisonment and a fine of 160,000 yuan; the defendant Du to one year and nine months imprisonment and a fine of 140,000 yuan; and the defendant Jiang to one year and nine months imprisonment and a fine of 90,000 yuan.

First Instance Case Number: (2021) Min0103Xingchu164

Case 3: Wang's Case of Fraud (Off-exchange financing using the virtual trading platform fraud model)

——Basic Case Details——

  2020 In April 2020, the defendant Wang purchased and established a fake stock financing platform called "Jiji Strategy" through the internet and established Shanghai Hongze Investment Management Co., Ltd. Wang lured others into investing in stocks through his company's account by promising high returns, but the funds invested by the victims did not enter the real stock exchange, and Wang used this to defraud the victims' investments. From June to August 2020, the victims deposited a total of 1,345,021 yuan into "Jiji Strategy," withdrew 328,646 yuan, and lost 1,016,375 yuan.

——Court Ruling——

The court found that the defendant Wang defrauded the victims' property with the purpose of illegal possession, using methods of fabricating facts and concealing the truth, and the amount was particularly large, and his actions constituted the crime of fraud and should be punished. Therefore, the court sentenced Wang to ten years imprisonment and a fine of 100,000 yuan. After the first-instance judgment was made, Wang appealed, and the second-instance court upheld the original judgment.

First Instance Case Number: (2020) Hu0113Xingchu2120

Second Instance Case Number: (2021) Hu02Xingzhong385

——(3) How to Prevent Off-Exchange Financing?

Off-exchange financing institutions do not have the qualifications to operate securities and futures business. Investors who need margin financing services should apply to regular securities firms.

Some off-exchange financing even uses methods such as "virtual trading platforms" and promises high returns, which constitutes illegal and criminal activities such as fraud.

When investors' assets are illegally infringed upon, such as being defrauded by participating in "off-exchange financing," please report to the local securities regulatory agency or public security organ in a timely manner.

——Conclusion——

Off-exchange financing operates outside of regulation, and its high leverage amplifies market fluctuations, disrupting the normal order of the capital market. It is an illegal activity. Participating in off-exchange financing may result in the loss of all principal. Investors must raise their awareness of prevention, participate in stock and futures trading through legitimate channels, stay away from off-exchange financing, and protect their own property safety.

References:

CSRC: Typical Cases of Off-Exchange Financing

http://www.csrc.gov.cn/csrc/c106299/c3452535/content.shtml