Resolve the real estate inventory and promote sustainable development of the real estate industry – this was first proposed at the Leading Group for Financial and Economic Affairs’ working conference in November 2015. However, according to commercial housing sales from January to November that year, the market is still facing enormous pressure in cutting inventory.
As a supplement to traditional financing, the rise of internet financing has effectively improved the efficiency of the allocation of financial resources. With the ability to raise funds in a short period of time, crowdfunding has become a preferred choice of many developers. The enormous pressure to cut inventory has led developers such as Vanke, Country Garden, Wanda and CITIC Real Estate to collaborate with Pinganfang.com, Tianxiadai, 51wofang.com, zhouchou.com and other crowdfunding platforms to release real estate crowdfunding options.
In 2015, the State Council issued a Guiding Opinion on Accelerating the Construction of Public Entrepreneurship and Innovation Support Platforms. For the first time, crowdfunding was defined as a new channel to expand investment and financing for entrepreneurship and innovation. Through the internet platform, crowdfunding is a more flexible and efficient way to raise funds. It can help to meet the financing needs of the product development, corporate growth and entrepreneurship. It effectively creates additional new functions to the traditional financial system for small micro-enterprises and entrepreneurs.
Accordingly, the purpose of crowdfunding is to solve the capital shortage problem and ultimately benefit investors with idle capital, small micro-enterprises and individual entrepreneurs.
Since there is no specific law regulating crowdfunding for real estate, rapid development in this area has caused some problems. First is the applicability of the Securities Law in real estate crowdfunding. Key legal relationships involved in real estate crowdfunding are those related to securities offerings. Therefore, from the perspective of the Securities Law, the primary problem is to distinguish the boundary between public offering and private placement. In light of article 10 of the Securities Law, which sets out that when securities are issued to non-specific parties or to more than 200 individuals, such conduct must be deemed as a public offering. Article 12 of the Private Equity Crowdfunding Financing Measures for the Administration for Trial Implementation (Draft) states that the financier must not issue securities in a public or disguised public way, and securities must be issued to a specific party.
When the financing is complete, the number of shareholders of the financier or corporation set up by the financier must not exceed 200. So real estate crowdfunding must be oriented to specific parties and the total number must not exceed 200. Pursuant to the Guiding Opinion on Promoting the Healthy Development of Internet Finance, crowdfunding must be conducted through an equity crowdfunding intermediary platform. Therefore, real estate crowdfunding that is conducted through intermediary platforms can be regarded as crowdfunding oriented to specific parties.
Second is the applicability of the Property Law in real estate crowdfunding. In Country Garden’s Shanghai project, “one square metre of land” is used as a crowdfunding unit. When the project is completed, investors can choose to convert their crowdfunding right into property rights.
The Regulatory Measures on the Sale of Commercial Houses stipulates that sales of commercial housing must not be divided, however the Property Law does not deny the model of co-ownership and there are no upper limits or restrictions. There is also no restriction from the Real Estate Registration on registering such property rights. However, after market research, it was found that the minimum registration area for Shanghai Putuo district is 15 square metres, seven square metres for Jing’an district and 10 square metres for Qingpu district. From this it can been seen that there remain major differences between the law as written and the law in practice, and the issue of rights in real estate crowdfunding needs further attention.
Third is the relationship between real estate crowdfunding and the Company Law, the number of shareholders and the corporate veil. Since the Company Law has limited the number of shareholders to 200 people, the Interim Measures for the Supervision and Administration of Privately Raised Investment Funds stipulates: “Where the investment in the privately raised funds is directly or indirectly made through pooling the funds of multiple investors in unincorporated forms such as partnership or contract, managers of privately raised funds and institutions selling privately raised funds shall look behind the corporate structures to evaluate whether the ultimate investor is a qualified investor or not, and calculate the aggregated number of investors.” So, if an investor in real estate crowdfunding is engaged in a partnership, there will be inspections that look beyond the surface of the corporations and the number of investors will be calculated aggregately.
In summary, real estate crowdfunding as a new form of economic activity needs to be constantly scrutinized and improved by legislation. The author proposes the following: 1) strengthen the protection of the rights of investors; 2) toughen the regulations on financiers; 3) establish institution platforms and strengthen the monitoring of operations. There must also be increased information disclosure and review obligations; 4) enhance the feasibility of real estate crowdfunding and solve problems – such as registration and the division of property rights – through the improvement of legislation; and 5) clarify the scope, authority and measures of the regulatory institutions to better protect the rights of investors and preserve market order.
Tan Jinghui is a director of City Development Law Firm in Beijing, and an arbitrator with Beijing Arbitration Commission/Beijing International Arbitration Centre. BAC/BIAC’s case manager, Ru Ming, also contributed to the article