Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 20-F

 

(Mark One)

 

o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019.

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

o

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

For the transition period from                       to                        

 

Commission file number: 001-39025

 

9F Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

N/A

(Translation of Registrant’s Name into English)

 

Cayman Islands

(Jurisdiction of Incorporation or Organization)

 

Jiufu Building, Rongxin Technology Center

Chaoyang District, Beijing 100102

People’s Republic of China

(Address of Principal Executive Offices)

 

Yanjun Lin, Chief Financial Officer

Jiufu Building, Rongxin Technology Center

Chaoyang District, Beijing 100102

People’s Republic of China

Tel: +86 (10) 8527-6996

Email: linyanjun@9Fbank.com.cn

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange On Which Registered

American depositary shares, each representing one Class A ordinary share

Class A ordinary shares, par value US$0.00001 per share*

 

JFU

 

The Nasdaq Global Market

 

The Nasdaq Global Market*

 


*Not for trading, but only in connection with the listing on The Nasdaq Global Market of American depositary shares.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

(Title of Class)

 

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

 

As of December 31, 2019, there were 195,191,000 ordinary shares outstanding, par value $0.00001 per share, being the sum of 128,228,600 Class A ordinary shares and 66,962,400 Class B ordinary shares.

 

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

o Yes   x 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.

o Yes   x No

 

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

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.

x Yes   o 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).

x Yes   o 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 the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Emerging growth company x

 

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. x

 

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. o Yes   x No

 

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

 

U.S. GAAP x

 

International Financial Reporting Standards as issued
by the International Accounting Standards Board
o

 

Other o

 

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.

o Item 17   o 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).

o Yes   x No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

o Yes   o No

 


Table of Contents

 

TABLE OF CONTENTS

 

INTRODUCTION

1

FORWARD-LOOKING STATEMENTS

3

PART I

5

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

5

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

5

ITEM 3. KEY INFORMATION

5

ITEM 4. INFORMATION ON THE COMPANY

70

ITEM 4A. UNRESOLVED STAFF COMMENTS

115

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

115

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

135

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

145

ITEM 8. FINANCIAL INFORMATION

149

ITEM 9. THE OFFER AND LISTING

150

ITEM 10. ADDITIONAL INFORMATION

151

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

166

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

167

PART II.

171

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

171

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

171

ITEM 15. CONTROLS AND PROCEDURES

171

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

173

ITEM 16B. CODE OF ETHICS

173

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

173

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

174

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

174

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

174

ITEM 16G. CORPORATE GOVERNANCE

174

ITEM 16H. MINE SAFETY DISCLOSURE

174

PART III.

175

ITEM 17. FINANCIAL STATEMENTS

175

ITEM 18. FINANCIAL STATEMENTS

175

ITEM 19. EXHIBITS

175

Index to Consolidated Financial Statements

F-1

 


Table of Contents

 

INTRODUCTION

 

Unless otherwise indicated and except where the context otherwise requires, references in this annual report to:

 

·                  “9F,” “us,” “our company”, “our” and “we” are to 9F Inc., its subsidiaries and its consolidated affiliated entities and their respective subsidiaries, as the context requires;

 

·                  “active borrowers” are to, for a specified period, borrowers who made at least one borrowing transaction with us during that period;

 

·                  “active investors” are to, for a specified period, investors who made at least one investment transaction with us during that period, excluding investors investing in our stock and insurance wealth management products;

 

·                  “ADSs” are to our American depositary shares, each of which represents one class A ordinary share;

 

·                  “China” or the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Hong Kong, Macau and Taiwan;

 

·                  “class A ordinary shares” are to our class A ordinary shares, par value US$0.00001 per share;

 

·                  “class B ordinary shares” are to our class B ordinary shares, par value US$0.00001 per share;

 

·                  “delinquency rate” are to loan principal that was 15-30, 31-60, 61-90 and 91-180 calendar days past due as a percentage of the total balance of outstanding principal of loans originated on our platform as of a specific date. Loan products that have been transferred to non-performing loan companies are not included in the calculation of delinquency rate;

 

·                  “financial institution partners” are to financial institutions that provide insurance and guarantee services, as well as the institutional funding partners;

 

·                  “fixed income products” are to investments in the loans facilitated through online lending information intermediary services for peer-to-peer lending and borrowing that are subject to the applicable PRC laws and regulations;

 

·                  “fixed income investment volume” are to the sum of the principal amount of all investment transactions executed by investors directly on our fixed income products during such period. The calculation of the fixed income investment volume of an investment made by an investor through the automated investing tools does not take into account automated reinvestment enabled by the automated investing tools;

 

·                  “institutional funding partners” are to banks and other institutions which have partnered with us on our direct lending program to fund loans originated to our borrowers;

 

·                  “loan origination volume” are to the total amount of loans originated to our borrowers, including the loan origination volume under our revolving loan products, non-revolving loan products and direct lending program during a given period. Loan origination volume for loans funded by institutional funding partners, regardless of its nature of revolving or non-revolving loans, are counted towards loan origination volume under our direct lending program;

 

·                  “M3+ Delinquency Rates by Vintage” are to the total balance of outstanding principal of a vintage for which any payment of principal is over 90 calendar days past due as of a particular date (adjusted to exclude total amount of past due payments for loan principal that have been subsequently collected in

 

1


Table of Contents

 

the same vintage), divided by the total initial principal originated in such vintage. Loan products that have been transferred to non-performing loan companies are not included in the calculation of M3+ Delinquency Rates by Vintage;

 

·                  “merchant partners” are to the online merchants and offline merchants connected by our online platforms including the merchants connected through our One Card-linked China UnionPay payment channels;

 

·                  number of “unique investors” in a given period are to the total number of investors who invested in our online wealth management products during such period;

 

·                  “Online Lending Information Intermediary Services” are to our online lending information intermediary services for peer-to-peer lending and borrowing that are subject to the applicable PRC laws and regulations, which include the revolving and non-revolving loan products we offer to borrowers and the fixed income products we offer to investors;

 

·                  “outstanding loan balance” at a certain point of time are to the total balance of outstanding principal of all the loan products, including revolving loan products, non-revolving loan products and loan products under our direct lending program as of a certain point of time. Outstanding loan balance for loans funded by institutional funding partners, regardless of its nature of revolving or non-revolving loan products, are counted towards outstanding loan balance under our direct lending program;

 

·                  “ordinary shares” or “Ordinary Shares” are to our class A ordinary shares and class B ordinary shares, par value US$0.00001 per share;

 

·                  “registered users” at a certain point of time are to the accumulative number of users who have registered their digital accounts with us (identified by registered mobile phone numbers) as of a certain point of time;

 

·                  “repeat investment rate” are to, for a specified period, the volume of the online wealth management products funded by investors who had successfully invested at least twice on our online wealth management platforms out of the total volume of the online wealth management products on our online wealth management platforms;

 

·                  “RMB” and “Renminbi” are to the legal currency of China;

 

·                  “US$,” “U.S. dollars,” “$” and “dollars” are to the legal currency of the United States;

 

·                  “users” are to our borrowers and investors; and

 

·                  “VIEs” or “consolidated affiliated entities” are to Jiufu Shuke Technology Group Co., Ltd. (“Jiufu Shuke,” formerly known as Beijing Jiufu Times Investment Consulting Co., Ltd., Jiufu Internet Finance Holdings Group Co., Ltd. and Jiufu Jinke Holdings Group Co., Ltd., successively), Beijing Puhui Lianyin Information Technology Co., Ltd. (“Beijing Puhui”), Zhuhai Huike Lianyin Technology Co., Ltd. (“Zhuhai Lianyin”), Beijing Jiufu Meihao Technology Co., Ltd. (“Jiufu Meihao”) and Beijing Wu Kong Mao Technology Co., Ltd. (“Wu Kong Mao,” formerly known as Beijing Chaoka Internet Technology Co., Ltd.).

 

2


Table of Contents

 

FORWARD-LOOKING STATEMENTS

 

This annual report contains forward-looking statements that relate to our current expectations and views of future events. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigations Reform Act of 1995.

 

You can identify some of these forward-looking statements by words or phrases 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 that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

 

·                  our goals and strategies;

 

·                  our expected growth of the online consumer finance and online wealth management industry in China;

 

·                  our expectations regarding demand for and market acceptance of our products and services;

 

·                  our expectations regarding our relationships with borrowers, investors, institutional funding partners and other partners we collaborate with;

 

·                  our future business development, results of operations and financial condition;

 

·                  competition in our industry;

 

·                  relevant government policies and regulations governing our corporate structure, business and industry;

 

·                  general economic and business condition in China and elsewhere;

 

·                  the impact of the COVID-19 on our business operations, the industries we are operating in and the economy of China and elsewhere generally; and

 

·                  assumptions underlying or related to any of the foregoing.

 

You should read this annual report and the documents that we refer to in this annual report and have filed as exhibits to this annual report completely and with the understanding that our actual future results may be materially different from what we expect. Other sections of this annual report discuss factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors emerge from time to time and it is not possible 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 materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

 

You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.

 

3


Table of Contents

 

Reliance on SEC Order Granting Conditional Exemptions Due to Circumstances Related to COVID-19

 

In accordance with an order issued by the Securities and Exchange Commission (the “SEC”) on March 25, 2020 under Section 36 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act;” such order, the “Release No. 34-88465”), we submitted a current report on Form 6-K on April 29, 2020 stating that we are relying on the Release No. 34-88465 to extend the due date for the filing of this annual report on Form 20-F. Substantially all of our operations are concentrated in China. In connection with intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of actions, which included extending the Chinese New Year holiday, quarantining individuals infected with or suspected of having COVID-19, restricting residents from travel, encouraging employees of enterprises to work remotely from home and cancelling public activities, among others. We have been taking measures in response to the outbreak, including the adoption of modified operating hours, remote working arrangement and more stringent workplace sanitation measures. These measures has resulted in certain disruption to our preparation of this annual report on Form 20-F for the fiscal year ended December 31, 2019, and led to our inability to file, on a timely basis, this annual report on Form 20-F by April 30, 2020, the original due date to file the annual report on this Form 20-F (the “Original Due Date”). Such disruptions include, but are not limited to the temporary closure of certain of our offices, the modified working hours, restrictions on the number of on-site employees, remote working arrangements, quarantines of certain of our employees, and difficulties in correspondence and business cooperation with our business partners and investees. All of these have hampered our ability to complete our financial statements and prepare this annual report on Form 20-F in time to be filed by the Original Due Date.  On June 15, 2020, we filed a Form 12b-25 since we are not unable, without unreasonable effort or expense, to file this annual report on Form 20-F by June 14, 2020, the prescribed filing date, because our U.S. GAAP audited financial statements are not yet available.  We relied on the Release No. 34-88465 and Rule 12b-25 of the Exchange Act for the filing of this annual report on Form 20-F.

 

4


Table of Contents

 

PART I

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

A.                                    Selected Financial Data

 

Our Selected Consolidated Financial Data

 

The following selected consolidated statements of operations data for the years ended December 31, 2017, 2018 and 2019, selected consolidated balance sheet data as of December 31, 2018 and 2019 and selected consolidated cash flow data for the years ended December 31, 2017, 2018 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this annual report. Our selected consolidated statements of operations data for the year ended December 31, 2016, selected consolidated balance sheets data as of December 31, 2016 and 2017 and selected consolidated cash flow data for the year ended December 31, 2016 have been derived from our audited consolidated financial statements not included in this annual report.  Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP.

 

You should read the selected consolidated financial information in conjunction with our consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Our historical results are not necessarily indicative of our results expected for future periods.

 

5


Table of Contents

 

 

 

Years Ended December 31,

 

 

 

2016

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

US$

 

 

 

(in thousands, except for per share data)

 

Selected Consolidated Statements of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Net revenues(4)

 

 

 

 

 

 

 

 

 

 

 

Loan facilitation services

 

2,157,782

 

6,272,796

 

4,960,671

 

3,477,897

 

499,569

 

Post-origination services

 

41,313

 

256,916

 

367,439

 

604,732

 

86,864

 

Others

 

61,557

 

212,068

 

228,372

 

342,334

 

49,173

 

Total net revenues

 

2,260,652

 

6,741,780

 

5,556,482

 

4,424,963

 

635,606

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing(1)

 

(1,168,416

)

(2,243,723

)

(1,746,375

)

(2,343,428

)

(336,611

)

Origination and servicing(2)

 

(168,024

)

(502,050

)

(444,830

)

(1,137,451

)

(163,385

)

General and administrative(3)

 

(494,902

)

(3,073,575

)

(1,159,746

)

(1,155,747

)

(166,013

)

Provision (reversal) for doubtful contract assets and receivables(4)

 

(32,740

)

(1,881

)

2,637

 

(2,148,638

)

(308,633

)

Total operating costs and expenses

 

(1,864,082

)

(5,821,229

)

(3,348,314

)

(6,785,264

)

(974,642

)

Interest income

 

13,422

 

73,639

 

208,350

 

225,751

 

32,427

 

Impairment loss of investments

 

 

 

(23,140

)

(154,898

)

(22,250

)

Gain recognized on remeasurement of previously held equity interest in acquiree

 

 

 

 

16,272

 

2,337

 

Net loss from disposal of subsidiaries

 

 

(8,135

)

(257

)

 

 

Other income, net

 

7,719

 

25,429

 

25,608

 

52,852

 

7,592

 

Income (loss) before income tax expense and earnings (loss) in equity method investments

 

417,711

 

1,011,484

 

2,418,729

 

(2,220,324

)

(318,930

)

Income tax benefit (expense)

 

(271,132

)

(352,432

)

(402,403

)

174,597

 

25,079

 

Earnings (loss) in equity method investments

 

15,047

 

64,701

 

(41,143

)

(107,918

)

(15,501

)

Net Income (loss)

 

161,626

 

723,753

 

1,975,183

 

(2,153,645

)

(309,352

)

Net income (loss) attributable to the non-controlling interest shareholders

 

(5,588

)

(126,049

)

6,621

 

(5,931

)

(852

)

Net income (loss) attributable to 9F Inc.

 

156,038

 

597,704

 

1,981,804

 

(2,159,576

)

(310,204

)

Change in redemption value of preferred shares

 

 

(47,759

)

(17,225

)

(10,711

)

(1,538

)

Deemed dividend to preferred shareholders

 

 

(103,550

)

 

 

 

Net income (loss) attributable to ordinary shareholders

 

156,038

 

446,395

 

1,964,579

 

(2,170,287

)

(311,742

)

Net income (loss) per ordinary shares

 

 

 

 

 

 

 

 

 

 

 

Basic

 

1.15

 

3.23

 

10.57

 

(12.43

)

(1.79

)

Diluted

 

1.07

 

2.93

 

9.41

 

(12.43

)

(1.79

)

Weighted average number of ordinary shares used in computing net income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

Basic

 

123,901,800

 

124,413,700

 

162,672,800

 

174,552,468

 

174,552,468

 

Diluted

 

134,305,200

 

138,465,500

 

185,735,200

 

174,552,468

 

174,552,468

 

Net income

 

161,626

 

723,753

 

1,975,183

 

(2,153,645

)

(309,352

)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment, net of tax of nil

 

17,372

 

(33,065

)

84,430

 

12,126

 

1,742

 

Unrealized gains (losses) on available for sale investments, net of tax of nil

 

194

 

1,071

 

(1,146

)

(99

)

(14

)

Total comprehensive income (loss)

 

179,192

 

691,759

 

2,058,467

 

(2,141,618

)

(307,624

)

Total comprehensive income (loss) attributable to the non-controlling interest shareholders

 

(5,588

)

(126,049

)

6,621

 

(5,931

)

(852

)

Total comprehensive income (loss) attributable to 9F Inc.

 

173,604

 

565,710

 

2,065,088

 

(2,147,549

)

(308,476

)

 


Notes:

 

(1)         Sales and marketing expenses include services provided by related parties of RMB168.3 million, RMB417.1 million, RMB37.8 million and RMB42.8 million (US$6.1 million) in 2016, 2017, 2018 and 2019, respectively.

 

(2)         Origination and servicing expenses include services provided by related parties of RMB11.6 million, RMB81.8 million, RMB39.0 million and RMB15.1 million (US$2.2 million) in 2016, 2017, 2018 and 2019, respectively.

 

(3)         General and administrative expenses include share-based compensation of RMB110.4 million, RMB2,180.5 million, RMB508.2 million and RMB353.2 million (US$50.7 million) in 2016, 2017, 2018 and 2019, respectively.

 

(4)         The amount of total net revenues and provision (reversal) for doubtful contract assets and receivables in 2019, as derived from our audited consolidated financial statements included in this annual report, reflect the impact of legal proceedings discussed in “Item 3. Key Information—D. Risk Factors” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information —Legal Proceedings”.

 

6


Table of Contents

 

The following table presents our selected consolidated balance sheet data as of the dates indicated.

 

 

 

As of December 31,

 

 

 

2016

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

US$

 

 

 

(in thousands)

 

Selected Consolidated Balance Sheets Data:

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

1,238,490

 

3,778,115

 

5,469,077

 

4,684,003

 

672,815

 

Restricted cash

 

146,129

 

671

 

 

125,437

 

18,018

 

Term deposits

 

 

700,000

 

833,478

 

24,000

 

3,447

 

Accounts receivable, net of allowance for doubtful accounts of 27,730, RMB29,611, RMB1,053 and RMB1,433,449 (US$205,902) as of December 31, 2016, 2017, 2018, and 2019, respectively

 

81,048

 

300,058

 

180,141

 

280,995

 

40,362

 

Other receivables, net of allowance for doubtful accounts of 5,010, RMB5,010, RMB5,010 and RMB36,773 (US$5,282) as of December 31, 2016, 2017, 2018, and 2019, respectively

 

184,029

 

91,428

 

146,438

 

117,340

 

16,855

 

Loan receivables, net of allowance for doubtful accounts of nil, nil, nil and RMB615,592 (US$88,424) as of December 2016, 2017, 2018 and 2019, respectively

 

84,770

 

126,200

 

593,943

 

778,480

 

111,822

 

Prepaid expenses and other assets

 

139,518

 

524,321

 

543,088

 

1,137,787

 

163,433

 

Long-term investments

 

152,028

 

509,736

 

954,158

 

775,644

 

111,414

 

Total Assets

 

2,153,661

 

6,275,783

 

9,107,961

 

8,880,364

 

1,275,583

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

94,176

 

384,070

 

346,847

 

788,906

 

113,319

 

Income tax payable

 

301,219

 

463,977

 

315,868

 

320,350

 

46,016

 

Accrued expenses and other liabilities

 

500,600

 

795,447

 

745,307

 

1,229,110

 

176,550

 

Total Liabilities

 

939,709

 

1,750,732

 

1,470,621

 

2,552,536

 

366,649

 

Mezzanine equity:

 

 

 

 

 

 

 

 

 

 

 

Series A convertible redeemable preferred shares

 

215,317

 

263,076

 

280,301

 

 

 

Series B convertible redeemable preferred shares

 

 

202,086

 

202,086

 

 

 

Series C convertible redeemable preferred shares

 

 

355,248

 

355,248

 

 

 

Series D convertible redeemable preferred shares

 

 

 

408,358

 

 

 

Series E convertible redeemable preferred shares

 

 

 

136,427

 

 

 

Total Shareholders’ Equity

 

998,635

 

3,704,641

 

6,254,920

 

6,327,828

 

908,934

 

 

 

 

Years Ended December 31,

 

 

 

2016

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

US$

 

 

 

(in thousands)

 

Summary Consolidated Cash Flow Data:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

 

413,972

 

2,865,590

 

2,345,892

 

(429,047

)

(61,629

)

Net cash used in investing activities

 

(222,910

)

(1,011,683

)

(1,236,820

)

(707,611

)

(101,640

)

Net cash provided by financing activities

 

701

 

563,360

 

545,886

 

471,978

 

67,795

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

204,499

 

2,394,167

 

1,690,291

 

(659,637

)

(94,751

)

Cash, cash equivalents and restricted cash at beginning of the year

 

1,180,120

 

1,384,619

 

3,778,786

 

5,469,077

 

785,584

 

Cash, cash equivalents and restricted cash at end of the year

 

1,384,619

 

3,778,786

 

5,469,077

 

4,809,440

 

690,833

 

 

We present our financial results in RMB. 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. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report were made at a rate of RMB6.9618 to US$1.00, the noon buying rate as of December 31, 2019.

 

B.                                    Capitalization and Indebtedness

 

Not applicable.

 

7


Table of Contents

 

C.                                    Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.                                    Risk Factors

 

Risks Related to Our Business and Industry

 

We operate in emerging and evolving industries, and our operations and products have been and may need to be modified in answering to the latest market trends, which makes it difficult to evaluate our future prospects.

 

The industries we are operating in are emerging and in general remain at relatively preliminary stages of development and may not continue to develop as rapidly as expected. The regulatory framework for the industries we operate in is also evolving and may remain uncertain for the foreseeable future. Furthermore, there are few established players with business models similar to ours in these industries. Potential borrowers, investors, institutional funding partners and other partners we collaborate with may not be familiar with the industries we are operating in, and may not fully appreciate the value we add and may have difficulty distinguishing our products and services from those of our competitors.

 

Furthermore, our past growth rates may not be indicative of our future growth. We may continue to introduce new products and services and make modifications to existing ones in response to or in anticipation of changes in industry landscape, user needs or regulatory scheme. For example, we have been rapidly developing our E-commerce channels since the end of 2019. We rebranded our online shopping platform of 9F One Mall to a wider user base, targeting customers of not only One Card users. We also connect more local life servicing consumption scenarios in connection with the verticals of health, entertainment, and tourism. See “Item 4. Information on the Company—B. Business Overview—Our E-Commerce Channels.” We may lack experiences on operating the business relating to new products and services. We also face competition from existing market players, which could result in low price competition. In addition, each of these new products and services, or modifications to existing ones calls for significant time and resource devotion of our managements, which may have an adverse impact on our financial condition, while we cannot assure you that our attempts to make such new products and services, or modifications to existing ones will be successful, profitable or widely accepted by customers. Furthermore, as new products and services, or modifications to existing ones may materially change the way we conduct our business, they may render the projection of our future operations obsolete, and therefore the future prospect may be difficult to evaluate.

 

In addition, in connection with the introduction of new products and services or in response to general economic conditions, we may impose more stringent borrower qualifications to ensure the quality of loan products which may negatively affect the growth of our business. It is therefore difficult to effectively assess our future prospects. You should consider our business and prospects in light of the risks and challenges we encounter or may encounter in this developing and rapidly evolving market. These risks and challenges include our ability to, among other things:

 

·                  navigate an evolving regulatory environment;

 

·                  expand the base of our borrowers, investors, institutional funding partners and other partners we collaborate with;

 

·                  enhance our risk management capabilities and maintain low delinquency rates of transactions facilitate by us;

 

·                  diversify our funding sources;

 

·                  improve our operational efficiency;

 

8


Table of Contents

 

·                  continue to scale our technology infrastructure to support the growth of our platform and higher transaction volume;

 

·                  broaden our product and service offerings;

 

·                  increase the utilization of our loan products by existing borrowers as well as new borrowers;

 

·                  operate without being adversely affected by the negative publicity about the industries in general and our company in particular, if any;

 

·                  maintain the security of our platform and the confidentiality of the information provided and utilized across our platforms;

 

·                  attract, retain and motivate talented employees to support our business growth;

 

·                  navigate economic condition and fluctuation;

 

·                  seek new business opportunities for future growth; and

 

·                  defend ourselves in litigation, and against regulatory, intellectual property, privacy or other claims.

 

We are subject to all risks and challenges inherent in developing business enterprise in emerging and evolving industries. If the industries do not develop as we expect, if we fail to educate potential borrowers, investors, institutional funding partners and our other partners about the value of our platform, products and services, or if we fail to address the needs of our borrowers, investors and partners, or other risks and challenges, our business and results of operations will be materially and adversely affected.

 

The laws and regulations governing the industries we operate in in China are developing and evolving and subject to changes, and our operations and products have been and may need to continue to be modified to ensure full compliance with applicable laws and regulations. If any of our business practice is deemed to violate any applicable laws, regulations or requirements of regulatory authorities, our business, financial condition and results of operations may be materially and adversely affected.

 

Since mid-2015, the PRC government and relevant regulatory authorities have issued various laws and regulations governing the industries we operate in, including, among others, the Guidelines on Promoting the Healthy Development of Internet Finance, or the Internet Finance Guidelines, the Interim Measures for Administration of the Business Activities of Online Lending Information Intermediaries, or the Interim Measures, the Guidelines on Online Lending Funds Custodian Business, or the Custodian Guidelines, the Guidelines on Administration of the Record-filing of Online Lending Information Intermediaries, or the Record-filing Guidelines, the Guidelines on Information Disclosure of Business Activities of Online Lending Information Intermediaries, or the Information Disclosure Guidelines, the Notice on the Performance of Check and Rectification of Cash Loan Business Activities and its supplementary notice, or the Notice on Cash Loan, the Notice on Rectification of Cash Loan Businesses, or the Circular 141, the Notice on Rectification and Inspection Acceptance of Risk of Online Lending, or the Circular 57 and the Notice on Conducting Compliance Inspection of the P2P Online Lending Information Intermediaries, or the Compliance Inspection Notice. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to our Business Operation in China—Regulations Related to Online Lending Information Intermediary Services.”

 

9


Table of Contents

 

To comply with existing laws, regulations, rules and governmental policies relating to the industries we are operating in, we have implemented and will continue to implement various policies and procedures to conduct our business and operations. However, due to the lack of detailed rules and the fact that the relevant laws, regulations, rules and governmental policies are expected to continue to evolve, we cannot be certain that our existing practices will not be deemed to violate any existing or future rules, laws and regulations. In addition, if there is any change to the existing PRC laws and regulations, we may be required to change the way we conduct our business or we may have to change our products and services into those that are less attractive to our users to ensure compliance, which may materially and adversely affect our business, financial condition and results of operation.

 

(i) If we fail to pass the compliance inspection and complete the record-filing for our Online Lending Information Intermediary Services, we may be forced to terminate our Online Lending Information Intermediary Services.

 

The Interim Measures introduced a record-filing and licensing regime, which requires online lending information intermediaries to register with the local financial regulatory authority. Our online lending information intermediary platform, Jiufu Puhui, operated by Jiufu Puhui, a subsidiary of one of our variable interest entities, is required to complete the record-filing with the local financial regulator. In December 2017, the Office of Leading Group on Special Rectification of Risks in the Online Lending, or the National Rectification Office issued the Circular 57, which requires certain local governmental authorities to establish an inspection team to conduct risk rectification inspections on online lending information intermediaries within their jurisdictions. For an intermediary that fails the inspection, it will be required to transfer its online lending information intermediary services to other intermediaries, or to terminate the business and exit the markets gradually, or be banned from conducting the business according to relevant laws and regulations, depending on the reasons for its failure to pass the inspection. Circular 57 also requires local authorities to complete record-filings of online lending information intermediaries within its jurisdiction by the end of April 2018, except that the deadline for certain complicated cases may be postponed to May 2018 or June 2018. However, the record-filings of online lending information intermediaries have not yet been officially launched nationwide. As of the date of this annual report, there has been no announcement as to when the filings will be completed. On August 13, 2018, the National Rectification Office issued the Compliance Inspection Notice, which requires each online lending information intermediary to be further inspected at three levels, including self-inspection carried out by the online lending information intermediary itself, self-discipline inspection carried out by a local internet finance association and/or the National Internet Finance Association of China, and the administrative verification carried out by the provincial online lending rectification office. Pursuant to the Compliance Inspection Notice, the compliance inspection shall be completed by the end of December 2018. The online lending information intermediaries that generally meet the requirement of being an intermediary and various standards will be allowed to link to the information disclosure and products registration system. After a period of operation and inspection, the online lending information intermediaries that meet relevant requirements can apply for record-filing. The standards and procedures for linking to the system and record-filing will be promulgated by the regulators separately. On August 24, 2018, the Office of Beijing Municipal Leading Group on Special Rectification of Risks in the Internet Finance, or Beijing Rectification Office, issued a Notice on Launch of Self-Inspection of P2P Online Lending Information Intermediaries Registered in Beijing, which requires the P2P online intermediaries registered in Beijing to commence self-inspection and to submit self-examination reports by September 30, 2018 and in any event no later than October 15, 2018. On August 27, 2018, the Beijing Internet Finance Association issued the Announcement on Launch of the Self-discipline Inspection of the Online Lending Information Intermediaries Registered in Beijing, which provides that the self-discipline inspection by it shall commence on September 10, 2018 and be completed by November 30, 2018.

 

10


Table of Contents

 

In February 2017, the Beijing Rectification Office issued a rectification notice to Jiufu Puhui, or the 2017 Rectification Notice. The 2017 Rectification Notice identified certain issues in Jiufu Puhui’s business operations which were deemed by the Beijing Rectification Office not to be in full compliance with applicable laws and regulations governing online lending information intermediaries, which include, among others, (i) failure to obtain or update relevant licenses, (ii) lack of certain internal control rules pertaining to examination of the qualification of lenders and borrowers, authenticity of information as well as the authenticity and legitimacy of financing projects, (iii) providing guarantee through risk reserve funds, (iv) failure to disclose to lenders adequate information about borrowers and financing projects, risk assessment and potential risk results, outstanding balance of the loan, and failure to disclose the audit report, compliance report and information security report of Jiufu Puhui issued by third-party agencies in a reasonable manner, and lack of a special column on its official websites for disclosing information on business operation and management, and (v) the balance of loans borrowed by the same individual exceeding the statutory borrowing limits. We have implemented various measures in response to the alleged non-compliance. In particular, for issue mentioned in subsection (i) above, Jiufu Puhui obtained a value-added telecommunications service operating license for internet information services, or an ICP License on January 10, 2017, and please see paragraph (ii) below for details. For issue mentioned in subsection (ii) above, we examined our practice and then reported to the Beijing Rectification Office that Jiufu Puhui had set up the required internal control rules and the alleged lack of the relevant internal control rules did not apply to us. For issue mentioned in subsection (iii) above, we began to use an investors’ protection plan featured third-party insurance and guarantee protection mechanism, as amended, instead of providing guarantee through quality assurance fund from our own custodian bank since August 2016, and please see paragraph (v) below and “Item 4. Information on the Company—B. Business Overview —Risk Management—Investor Protection Mechanism.” for details. For issue mentioned in subsection (iv) above, we opened a special column on our official websites for information disclosure, publishing the audit report and compliance report of Jiufu Puhui issued by the relevant third-party agencies, and conducted the necessary rectification on other information disclosure aspects in compliance with relevant laws and regulations, and please see paragraph (ix) below for details. For the subsection (v) above, we stopped granting loans to the same individual in an aggregate amount exceeding RMB200,000 since the beginning of 2017 and have also gradually reduced the balance of loans that exceeding the RMB200,000 limit, and please see paragraph (iv) below for details. We believe that we have completed these rectifications to address the issues identified in the 2017 Rectification Notice and do not need to implement additional rectification measures in response to the alleged non-compliance above. However, we are uncertain as to whether our rectification measures will be sufficient to ensure full compliance with the regulatory requirements due to the lack of detailed interpretation and implementation of these requirements. See paragraphs (ii) - (ix) below for details. As the Compliance Inspection Notice issued in August 2018 provides for updated procedures and requirements for inspections and rectifications, we are required to submit a self-examination report and go through inspections and verifications by internet finance associations, the Beijing Rectification Office and its competent authorities in accordance with these new rules, instead of submitting further reports in response to the 2017 Rectification Notice. We submitted the self-examination report on September 27, 2018 and as of the date of this annual report, we have not received any comments from Beijing Rectification Office on our self-examination report. The National Internet Finance Association of China has commenced the self-discipline inspection on us since October 2018, the Beijing Internet Finance Association has commenced the self-discipline inspection on us since November 2018, and as of the date of this annual report, we have not received any comments from the National Internet Finance Association of China or the Beijing Internet Finance Association. In May 2019, we were inspected by the Office of Finance of Fangshan District of Beijing, a competent authority under Beijing Rectification Office, and were allowed to link to information disclosure and products registration system. As of the date of this annual report, we have not received any comments from the Office of Finance of Fangshan District of Beijing.

 

11


Table of Contents

 

It was reported that the Leading Group Office of the Internet Financial Risk Rectification Campaign and the National Rectification Office jointly held a symposium on rectification of risks in online lending business in July 2019, the main contents of which cover, among others, (i) in the third quarter of 2019, relevant authorities shall continue to strictly implement the requirements of reducing number of online lending platforms, their business scale and number of involved borrowers and lenders; (ii) for those institutions that fulfill the requirements in terms of the area such as capital requirements and professional management capabilities, they shall be allowed and encouraged to apply to change their business into the business such as online micro-lending and consumer finance; (iii) for those institutions that intend to change their business or exit from the online lending information intermediary industry, relevant authorities shall supervise such institutions to formulate and implement the exit plan as soon as possible; and (iv) in the fourth quarter of 2019, on the basis of the completion of the works such as compliance inspection, connection of relevant information system, data verification, relevant authorities shall carry out classification and management of online lending institutions on a case-by-case basis, and allow the qualified institutions to be accepted into the list of regulatory pilot. As of the date of this annual report, we have learned no updates to the implementation of regulatory pilot mentioned in the symposium above. In November 2019, the Leading Group Office of the Internet Financial Risk Rectification Campaign and the National Rectification Office jointly promulgated the Guiding Opinions on the Pilot Transformation Program of Online Lending Information Intermediary into Micro-lending Companies, or Circular 83, which provides that the local government may, in combination with the compliance inspection, guide certain qualified online lending information intermediaries to resolve the outstanding business risk through transformation to micro-lending companies on a voluntary basis. Circular 83 provides a means for online lending information intermediaries to proactively handle and resolve the risks of its existing business in addition to the record-filings of online lending information intermediaries. As of the date of this annual report, we do not expect to make substantive adjustment to our business model and operations towards to micro-lending business.  There can be no assurance that we will be able to receive final clearance on our self-examination report, pass the inspections and verifications conducted or to be conducted by internet finance associations, the Beijing Rectification Office and its competent authorities, submit the application for record-filing and complete the record-filing. If we fail to fully comply with the continuing challenging regulatory requirements or fail to complete the record-filing, we may be required to adjust our business model and operations, or even will be forced to terminate our online lending information intermediary business. As of the date of this annual report, to the best of our knowledge, we do not expect to take further rectification measures to make substantive adjustment to our business operations, and we do not anticipate any material impact on our financial statements resulting from the 2017 Rectification Notice and any current laws, regulations and implemented measures to ensure compliance. Given the challenging and evolving regulatory framework in China, we are not certain whether any future laws, regulations and implemented measures will have any material negative impact on our financial statements.

 

12


Table of Contents

 

(ii) If we fail to obtain, renew and update necessary licenses, we may be subject to fines and forced to discontinue our relevant business or impose restrictions on the affected portion of our business, which may have a material adverse effect on our business and results of operations.

 

We may be required to apply for additional licenses for our business operations. The Interim Measures requires online lending information intermediaries to include online lending information intermediary services within its business scope, and to obtain a telecommunication business license from the relevant telecommunication regulatory authority. Jiufu Puhui which operates our online lending information intermediary services platform, Jiufu Puhui, has obtained an ICP License which will remain effective until January 10, 2022. Jiufu Shuke Technology Group Co., Ltd., one of our variable interest entities, has also obtained an ICP License which will remain effective until March 9, 2022. However, the online lending information intermediary services we provided are also subject to a value-added telecommunications service operating license for the online data processing and transaction processing services, or an EDI License which Jiufu Puhui does not have. In addition, Jiufu Puhui has not included online lending information intermediary services within its business scope. Jiufu Puhui plans to update its business scope set forth in its business license and apply for the EDI License after completion of recording-filing with the local financial regulator. Beijing Jiufu Meihao Technology Co., Ltd. and Shenzhen Premium Quality Mall Technology & Trade Co., Ltd., two subsidiaries of our variable interest entities, have obtained the EDI License for operating our online shopping platform. We may also apply for additional EDI licenses to satisfy the need of our future business operation. Besides, the operation of our online shopping platform 9F One Mall may also be subject to certain other licenses we have not obtained, such as payment business license. However, we cannot assure you that we can obtain such licenses successfully. If the relevant governmental authorities consider 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 relevant governmental authorities may have a material adverse effect on our business and results of operations.

 

(iii) Increasing restrictions on our custodian bank arrangement may require us to amend our custody account agreement with Huaxia Bank or seek an alternative qualified custodian bank.

 

As the Interim Measures requires the intermediaries that provide online lending information intermediary services to set up custody accounts with qualified banks to hold user funds, and the Custodian Guidelines further require that the intermediaries shall designate a unique custodian, which shall be a commercial bank, as its fund custody institution. See “Item 4. Information on the Company—B. Business Overview—Regulations— Regulations Related to Online Lending Information Intermediary Services— Regulations related to fund custodian.”  We have entered into an agreement with China Huaxia Bank Beijing Branch, under which the bank provides fund depositary services for borrowers and investors. Although we believe the custodian mechanism in this agreement is in compliance with the requirement of the Interim Measures, the Custodian Guidelines and the regulatory authorities, we may need to amend the agreement to comply with the Custodian Guidelines in the event of any newly promulgated detailed implementation rules pursuant to the Custodian Guidelines, or other new laws and regulations regulating the custodian mechanism applicable to online lending information intermediaries. In addition, Circular 57 requires online lending information intermediaries to set up custodian accounts with qualified banks that have passed certain testing and evaluation procedures run by the National Rectification Office to hold customer funds. The National Rectification Office has authorized the National Internet Finance Association of China to run the testing and evaluation. Pursuant to a statement made by China Huaxia Bank on September 18, 2018 and published on the national internet finance registration and disclosure services platform, which is operated by the National Internet Finance Association of China, on September 20, 2018, China Huaxia Bank has passed such testing and evaluation procedures on September 14, 2018. However, if China Huaxia Bank fails to maintain its qualification in future, we may have to seek to cooperate with another custodian bank satisfying the relevant regulatory requirements, and we cannot assure you that under such circumstances, we will be able to find and reach an agreement with a qualified bank in a timely manner or with terms commercially favorable to us. In that case, our rectification and record-filing application progress, as well as our business, may be materially and adversely affected.

 

13


Table of Contents

 

(iv) The aggregate amount extended to any borrower through our platform and other online lending information intermediaries may exceed the applicable borrowing limits.

 

The Interim Measures requires that the balance of loans borrowed by the same individual must not exceed RMB200,000 on a single online lending information intermediary and not exceed RMB1 million in the aggregate on all online lending information intermediaries in the PRC. Circular 57 and the Issue Checklist for Compliance Inspection of Online Lending Information Intermediaries issued by the National Rectification Office simultaneously with the Compliance Inspection Notice, or the Compliance Inspection Checklist, further prohibits online lending information intermediaries from facilitating any new loans exceeding the foregoing borrowing limits after August 24, 2018. We currently do not offer loans to the same individual in an aggregate amount exceeding RMB200,000. We determine whether borrowers have additional outstanding loans using external databases at the time they apply for a loan through our platform. We also review borrower records on a regular basis. However, due to the lack of an industry-wide information sharing arrangement, there can be no assurance that the aggregate amount borrowed by any borrower through our platform and other online lending information intermediaries does not exceed the RMB1 million borrowing limit set out by the Interim Measures.

 

(v) If our existing practice is viewed by the PRC regulatory authorities as that we are providing security or guarantee to the investors, we may be required to change our business operations relating to the protection of investors.

 

The Interim Measures prohibits online lending information intermediaries from providing any security or guarantee to investors on the principal or return of their investments. Circular 57 further prohibits online lending information intermediaries from setting up new risk reserve funds or increasing existing risk reserve funds, and requires them to gradually reduce the existing risk reserve funds. There are also certain legal requirements governing guarantee companies under PRC laws and regulations. Pursuant to the Regulations on the Supervision and Administration of Financing Guarantee Companies promulgated by the State Council in August 2017, any entity operating “financing guarantee business” is required to obtain an approval from the local regulatory authorities. An entity operating financing guarantee business without such approval may be subject to penalties, including termination or suspension of business, fines ranging from RMB500,000 to RMB1,000,000, confiscation of illegal gains if any, and if the violation constitutes a criminal offense, criminal liability shall be imposed in accordance with the law. In October 2019, the China Banking Regulatory Commission (currently known as China Banking and Insurance Regulatory Commission), or CBRC, together with eight other regulatory agencies jointly promulgated the Supplemental Rules to the Administration of Financing Guarantee Companies, pursuant to which any entity providing client referral or credit assessment services to the lending institutions may not provide financing guarantee services in a direct or a disguised form without the regulatory approval. If an entity operates financing guarantee business without appropriate approval, its business operations will be banned by the regulatory authorities and it will be required to properly settle existing business. Historically, we charged borrowers quality assurance fund at a floating rate of the loan principal and deposited the quality assurance fund in our custodian bank account. In addition, if the loan repayment proceeds we received from the borrowers were higher than the expected return of the investor, the higher portion will be deposited in our custodian bank account in the form of quality assurance fund. We used to use the total amount of quality assurance fund in our custodian bank account to compensate the affected investors when the loans become due, which may be viewed as we providing a security interest or guarantee to our individual investors and is expressly prohibited under Circular 57. We used to cooperate with insurance companies and financing guarantee companies under our Online Lending Information Intermediary Services, and since February 2020, have changed our practices and are now cooperating with Beijing Zhongtian Caizhi Financing Guarantee Co., Ltd., or Zhongtian Guarantee, a financing guarantee company under our Online Lending Information Intermediary Services. For all the new loans originated since February 2020, borrowers are required to pay money contributions to the depositary account set up by Zhongtian Guarantee. However, it is uncertain how the Interim Measures, Circular 57 and the PRC laws and regulations governing guarantee companies and insurance companies will be interpreted due to the lack of detailed implementation rules. As a result, we cannot rule out the possibility that our existing practice might be viewed by the PRC regulatory authorities as that we are providing security or guarantee to the investors, the financing guarantee company or otherwise violating the Interim Measures, Circular 57 and other PRC laws and regulations as the interpretation and implementation of the PRC laws and regulations evolve. In such event, we may be required to change our business operations relating to the protection of investors, which may make us less attractive to our funding sources, and may materially and adversely affect our business, financial condition and results of operations.

 

14


Table of Contents

 

(vi) If any of our products are viewed by the relevant governmental authorities as resulting in transfers prohibited under Circular 57, we may be required to modify our current business practices or be subject to other penalties.

 

Circular 57 permits low frequency transfers of lenders’ rights to loans between lenders for liquidity purpose, but expressly prohibits certain transfers, including transfers of lenders’ rights in form of assets-backed securities, trust assets, fund properties and certain other form of securities, and transfers as a result of online lending information intermediaries providing current or fixed-term financial products to lenders, the terms of which are not consistent with the terms that the corresponding borrowers intend to borrow the loans for. It also prohibits online lending information intermediaries from facilitating lenders to borrow on their platforms by using their creditors’ rights to loans as pledge or mortgage for liquidity purpose. The Compliance Inspection Checklist further sets forth certain prohibited actions and exceptions in respect of inconsistent lending and borrowing terms. We allow and facilitate lenders to transfer their rights to loans on our platform. Due to lack of detailed implementation rules to Circular 57 and the Compliance Inspection Checklist, we cannot assure you that all our practices would be deemed to comply with Circular 57 and the Compliance Inspection Checklist. If any of our products are viewed by the relevant governmental authorities as resulting in transfers and other actions prohibited under Circular 57 and the Compliance Inspection Checklist, we may be required to modify our current business practices or be subject to other penalties, which could be costly, and as a result, our business, financial condition and results of operations might be materially and adversely affected.

 

(vii) If any loan products we provide are deemed as cash loans by the relevant governmental authorities, we may be required to modify our current business practices and cease to facilitate such loans, or be subject to other penalties.

 

In April 2017, the National Rectification Office, issued the Notice on Cash Loan, which requires the local branches of the National Rectification Office to conduct a comprehensive review and inspection of the cash loan business of online lending platforms and requires such platforms to implement necessary improvements and remediation within a specific period to comply with the relevant requirements under the applicable laws and regulations. As of the date of this annual report, we have not been subject to any inspection as may be required under the Notice on Cash Loan.

 

In December 2017, the Leading Group Office of the Internet Financial Risk Rectification Campaign and the National Rectification Office jointly promulgated Circular 141, which sets out certain principles in connection with cash loan businesses. Due to the uncertainties with respect to the interpretation and application of the laws and regulations relating to cash loan business, we cannot assure you our business practice will be deemed to be in full compliance with all such existing or future laws and regulations. For example, Circular 141 prohibits online lending information intermediaries from facilitating loans without clear and specified purposes. Circular 57 further requires online lending information intermediaries that have been engaged in cash loan business to suspend any new cash loan business and reduce existing cash loan business in accordance with Circular 141. Although we require borrowers to specify and undertake the usage of the loans when they apply for the loans, for those loans released to the borrowers directly, we cannot ensure that all those borrowers will comply with their undertaking, nor can we ensure that such requirement is sufficient for those loans to be deemed by the governmental authorities as not falling within the aforementioned prohibited scope. If any of our products under which loans are released to the borrowers directly is viewed by the relevant governmental authorities as cash loans under Circular 141, we may be required to modify our current business practices and cease to facilitate such loans, or be subject to other penalties, which could be costly, and as a result, our business, financial condition and results of operations might be materially and adversely affected.

 

15


Table of Contents

 

(viii) If our current practice of charging and collecting interest and fees is determined to have violated Circular 141, our reputation, results of operations and financial condition would be adversely affected. There is no clearly defined method for calculating annual interest and fee rates.

 

Circular 141, among other things, requires that the interest and all kinds of fees charged to a borrower for a loan should not exceed the annualized ceiling provided under the Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases issued by the Supreme People’s Court in August 2015, or the Private Lending Judicial Interpretations. Pursuant to the Private Lending Judicial Interpretations, if the aggregate rate of annual interest and all relevant fees (expressed as a percentage of the loan principal), or borrowing costs rate per annum, is higher than 36%, the agreement in respect of the interest and fees represented by the percentage exceeding 36% would be invalid, and if the parties agree on aggregate annual interest and fees (expressed as a percentage of the loan principal) that represents a rate above 24% but not exceeding 36%, the agreement is valid but the lender would not have judicial protections in respect of the part of interest and fees represented by the percentage exceeding 24%. Online lending information intermediaries, including Jiufu Puhui operated by us, are prohibited from facilitating any loans, the applicable borrowing costs per annum of which exceed the ceiling provided under the Private Lending Judicial Interpretations. However, there is no clearly defined and official method for calculating annual interest and fee rates, and various industry participants use different methods.

 

According to the explanations of the National Internet Finance Association of China during its self-discipline inspection of its members pursuant to the Compliance Inspection Notice we received in October 2018, which we follow in preparing for the self-discipline inspection, interest payable to investors, service fees charged by us for our loan facilitation services and post-origination services, post-loan service fees payable to third-party collection companies for loan collection and arbitration services, prepayment fees and penalty fees shall be taken into account in the calculation of applicable borrowing costs per annum, or the annual interest and fee rates, which is presented in the form of APR for our Online Lending Information Intermediary Services. We calculate APR for loans we facilitate to borrowers under our direct lending program by reference to the explanation of the National Internet Finance Association of China referred to above, and interest payable to institutional funding partners, service fees charged by us directly from the borrowers until April 2019 and prepayment fees and penalty fees are presented in the form of APR for loans we facilitate to borrowers under our direct lending program. As of the date of this annual report, we do not have any outstanding loan balance that we have facilitated since the promulgation of Circular 141 with an APR of higher than 36%, even inclusive of any additional fees incurred by borrowers in relation to third-party insurance and guarantee protection, such as insurance premiums to the insurer, money contributions to the depository account and guarantee fee to the guarantee company. As of December 31, 2019, our outstanding loan balance with an APR of between 24% and 36% was RMB7.4 billion (US$1.1 billion), and our outstanding loan balance facilitated prior to the promulgation of Circular 141 with an APR of higher than 36% was RMB1.0 billion (US$0.1 billion). We may continue to facilitate loans at or above the APR of 24% but no more than 36%. In the event that any of such loans become delinquent, we will not be able to collect the part of the borrowing costs that exceed 24% per annum through PRC judicial enforcement. We do not believe that the current borrowing costs charged to our borrowers violate these provisions. In 2020, we have gradually adopted the internal rate of return method in the calculate of applicable APR for loans under our directly lending program. The internal rate of return method is a more stringent method than the method we previously applied when we calculate the applicable APR for loans under our directly lending program.

 

If the method of calculating applicable borrowing costs rate per annum used by the competent authorities, PRC governmental authorities or the PRC courts is different from our method of calculating APR, or if a more stringent method of calculating the applicable borrowing costs rate per annum is implemented or if the relevant regulations are interpreted by the competent authorities, PRC government authorities or the PRC courts in the future to require a more stringent method of calculating such rate, the applicable borrowing costs rate per annum for some of our loan products may exceed 36% per annum, and the portion of the borrowing costs representing the percentage that exceeds 36% per annum may be determined to be invalid, and we may have to revise the terms and reduce borrowing cost applicable to our current outstanding loans and new loans facilitated, which would affect our results of operations and financial condition materially and adversely. As a result, the investors of our fixed income products or the institutional funding partners under our direct lending program may suffer losses, which would damage our reputation and harm our business. Were these to happen, our reputation, results of operations and financial condition would be adversely affected.

 

16


Table of Contents

 

(ix) If our current fee collection method is deemed as up-front deductions from loans released to the borrowers by the relevant regulatory authorities, we may be required to modify our current business practices or be subject to other penalties.

 

Circular 141 also prohibits online lending information intermediaries from deducting interests, commissions, management fees and deposits from the loans before they are released to the borrowers. Before November 2019, under our Online Lending Information Intermediary Services, the service fees for our loan facilitation services and post-origination services, the post-loan service fees to be paid to third-party collection companies for loan collection services and arbitration services, and the insurance premium to be paid to insurer or the money contribution to the depository account and the guarantee fee to be paid to a financing guarantee company for the guarantee services provided, as the case may be, were arranged to be paid by the borrowers simultaneously when the principals of the fund are released to the borrowers. Since November 2019, for loans under both of the Online Lending Information Intermediary Services and direct lending program, all the relevant fees to be paid by borrowers have been arranged to be paid either simultaneously when the principals of the fund are released or in installments when the borrowers repay the loans, based on the fee collection policy applied to the corresponding loan products. There are still uncertainties on how the regulatory authorities will interpret and enforce the requirements under Circular 141. If our current fee collection method is deemed as up-front deductions from loans released to the borrowers by the relevant regulatory authorities, or our other practices are deemed as violating the foregoing requirements, we may be required to modify our current business practices or be subject to other penalties, which could be costly, and as a result, our business, financial condition and results of operations might be materially and adversely affected.

 

(x) If the relevant governmental authorities identify that our current information disclosure practice do not satisfy the legal requirements, we may be required to modify our current information disclosure practice or be subject to other penalties.

 

In August 2017, CBRC released the Information Disclosure Guidelines to regulate information disclosure by online lending information intermediaries. Pursuant to the Information Disclosure Guidelines, online lending information intermediaries are required to disclose certain information through their own official websites and other internet channels such as mobile phone apps, WeChat official account and microblog. As the Information Disclosure Guidelines is relatively new and its interpretation and implementation may evolve, we cannot assure you that our current information disclosure practices would be deemed to comply with the regulation. If the relevant governmental authorities identify that our current information disclosure practice do not satisfy the legal requirements, we may be required to modify our current information disclosure practice or be subject to other penalties, which could be costly, and as a result, our business, financial condition and results of operations might be materially and adversely affected.

 

(xi) If our direct lending program is deemed to be in violation of relevant PRC laws and regulations, our business, financial condition and prospects would be materially and adversely affected.

 

We have been rapidly developing our direct lending program to further strengthen and diversify our funding source since 2018. We provide traffic referral and risk management services to institutional funding partners in cooperation with PICC with whom we have suspended the cooperation on new loans since December 2019 or financing guarantee companies under our direct lending program allowing the institutional funding partners to access borrowers who have passed our risk assessment, under which the insurance company or the financing guarantee companies, as the case maybe, provides credit insurances or guarantee protection to the institutional funding partners. The PICC with whom we have suspended the cooperation on new loans since December 2019 or financing guarantee companies also benefits from our risk management capabilities to provide credit insurance or guarantee protection on loans of high-quality borrowers. The institutional funding partners make the final credit decision based on their own credit assessment and are also in charge of funding and servicing the loans. We also provide services after loan origination such as repayment facilitation and loan collection. See “Item 4. Information on the Company—B. Business Overview —Users and Partners—Financial Institution Partners—Institutional Funding Partners” for details. The loans funded by the institutional funding partners, the relevant operation of us and PICC with whom we have suspended cooperation on new loans since December 2019 or financing guarantee companies providing credit insurance or guarantee protection are also subject to applicable provisions of Circular 141 as abovementioned, including interest and fee rate. In addition, Circular 141 also sets forth several requirements on banking financial institutions participating in “cash loan” business, including, among other things, (i) with respect to the loan business conducted in cooperation with third-party institutions, such banking financial institutions shall not outsource the core business (including the credit assessment and risk control), and shall not accept any credit enhancement service whether or not in a disguised form (including the commitment to taking default risks) provided by any third-party institutions with no guarantee qualification and (ii) such banking financial institutions must require and ensure that the third-party institutions shall not collect any interests or fees from the borrowers. There are still uncertainties on how the regulatory authorities will interpret and enforce the requirements under Circular 141. In addition, the Beijing Internet Finance Association issued the Notice on Strengthening Business Standards and Risk Prevention by Loan Facilitation Institutions on April 2, 2019, or the 2019 Notice, which requires the institutions providing loan facilitation services to only cooperate with licensed financial institutions or quasi-financial institutions. The 2019 Notice also prohibits (i) such institutions without relevant guarantee qualifications from providing credit enhancement services when they collaborate with licensed financial institutions or quasi-financial institutions, (ii) such institutions from collecting any interests or fees from the borrowers, and (iii) such institutions from stealing, abusing, illegally trading or disclosing the information of the borrowers. Under our direct lending program, we have stopped charging service fees directly from borrowers since April 2019. We currently charge service fees from financial institution partners under our direct lending program. If our direct lending program is deemed to be in violation of Circular 141 or the 2019 Notice, we may be required to modify our business practice and/or be subject to penalties.

 

17


Table of Contents

 

Meanwhile, we have collaborated and will enhance such collaboration with our institutional funding partners, whose compliance with PRC laws and regulations may affect our business. Our collaboration with institutional funding partners in our direct lending program has exposed us to and may continue to expose us to additional regulatory uncertainties faced by such institutional funding partners. We cannot assure you that the business operations of our institutional funding partners currently are or will be in compliance with the relevant PRC laws and regulations, and in the event that our institutional funding partners do not operate their businesses in accordance with the relevant PRC laws and regulations, they will be exposed to various regulatory risks and therefore, our business, financial condition and prospects would be materially and adversely affected.

 

In addition to the abovementioned potential risk factors related to our business under the PRC laws and regulations, we are also unable to predict with certainty the impact, if any, that future legislation, judicial precedents or regulations relating to the industries we are currently operating in will have on our business, financial condition and results of operations. For example, in May 2020, CBRC released a draft of Interim Measures for Administrative of Online Loans by Commercial Banks (Draft for Comments), or the Draft Measures, for comments from the public. The Draft Measures intend to formulate the regulation regime for online lending business conducted by commercial banks, and, if enacted, will change regulatory requirements for our direct lending program in various aspects. For example, the Draft Measures require that a commercial bank shall not grant an individual with a credit line more than RMB200,000 and the term of loan to an individual shall not exceed one year in the case of repayment of the principal due in a lump sum. In addition, the Draft Measures set several rules for commercial banks to collaborate with external institutions on online loans, including: (i) commercial bank shall conduct pre-admission assessments on cooperative external institution based on its operating conditions, management capabilities, risk control capabilities, technical strength, service quality, business compliance and institutional reputation, etc.; (ii) the collaboration agreement between the commercial banks and the cooperative external institutions shall specify that the cooperative external institution shall not charge any interest or expense to the borrower in any form; (iii) commercial bank shall independently carry out risk assessment and credit approval for the loans it contributes, and assume the primary responsibility for post-loan management; (iv) commercial banks shall not accept any direct or disguised credit enhancement service provided by any third-party institution without guarantee qualifications or which fails to meet the regulatory requirements for credit insurance and guaranteed insurance business qualifications; and (v) commercial banks shall not finance the loans through the cooperative external institutions. Furthermore, the growth in the popularity of online consumer finance increases the likelihood that the PRC government will seek to further regulate this industry. In addition, we have been expanding our businesses and may enter into new business areas when we think fit. Due to the complexities and uncertainties of PRC laws and regulations governing the new industries we are going to operate our business in, we cannot assure you that all our new business operations in the future will be in compliance with the relevant laws and regulations applicable to the new industries.

 

As of the date of this annual report, except for a fine of RMB200,000 for promoting our financing projects on our website without reasonable risk warning to investors, we have never been subject to any material fines or other penalties under any PRC laws or regulations regarding our online personal financing business, including those governing the industries we are operating in in China. However, to the extent that we are not able to fully comply with any existing or new regulations when they are promulgated, our business, financial condition and results of operations may be materially and adversely affected.

 

18


Table of Contents

 

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

 

We may from time to time become subject to or involved in various claims, controversies, lawsuits, and legal proceedings. However, claims, lawsuits, and litigations are subject to inherent uncertainties, and we are uncertain whether the foregoing claim would develop into a lawsuit. Lawsuits and litigations may cause us to incur litigation 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 unfavorable settlements or judgments against us could have a material adverse impact on our results of operations, financial condition, liquidity 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.

 

We and PICC Property and Casualty Company Limited Guangdong Branch (the “PICC”) are pursuing legal actions against each other. In May 2020, we commenced a legal proceeding against PICC by submitting a complaint with a local court in Beijing for contract non-performance under a cooperation agreement, as amended (the “Cooperation Agreement.”) We, together with our legal counsel of the case has determined that PICC has breached its contractual obligation under the Cooperation Agreement for not paying service fees that were due to us under our direct lending program. We are seeking payments of approximately RMB2.3 billion from PICC to cover the outstanding service fees and related late payment losses. After our legal action was filed against PICC, PICC filed a civil lawsuit against us at a local court in Guangzhou claiming that the second amendment under the Cooperation Agreement is invalid, and therefore PICC is not obligated to pay any outstanding service fees and that a portion of the service fees  paid to us under the Cooperation Agreement plus accrued interest should be returned back to PICC. We will vigorously assert our rights against PICC and defend ourselves against any claims brought against us by PICC in these legal proceedings. However, both actions remain at the preliminary stage, and it is not possible at this stage to ascertain the outcome of either of the lawsuits. If we do not prevail in either of the lawsuits completely or in part, or fails to reach a favorable settlement with PICC, our results of operations, financial condition, liquidity and prospects would be materially and adversely affected.  See “—If we are unable to maintain low delinquency rates for loans originated to our borrowers, our business, financial conditions and results of operation may be materially and adversely affected.” and “—Loss of or failure to maintain relationship with our partners or implement our strategy to develop new relationships with other potential partners may materially and adversely affect our business and results of operations.” for other negative impact.

 

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

 

The recent outbreak of a novel strain of coronavirus, now named as COVID-19, was reported to have surfaced in China and now spread rapidly to many parts of the world. The epidemic has resulted in quarantines, travel restrictions, and the temporary closure of facilities in China and many other countries for the past few months. In March 2020, the World Health Organization declared the COVID-19 a pandemic.

 

19


Table of Contents

 

Substantially all of our operations are concentrated in China. In connection with intensifying efforts to contain the spread of COVID-19, the Chinese government took a number of measures, which included extending the Chinese New Year holiday, quarantining individuals infected with or suspected of having COVID-19, restricting residents from travel, encouraging employees of enterprises to work remotely from home and cancelling public activities, among others. Normal economic life throughout China was sharply curtailed. Consequently, our business, financial condition and results of operations have been and are likely to continue to be materially and adversely affected by the outbreak of COVID-19. The outbreak of COVID-19 led to a suspension of business activities across various sectors in China and is likely to result in a rise in unemployment, which may weaken the debt repayment ability of borrowers for loans under our Online Lending Information Intermediary Services and our direct lending program. Increased borrower defaults for loans under our Online Lending Information Intermediary Services and our direct lending program could in return result in enhanced risks and financial losses to our investors, financial institution partners and other business partners. Although we are a digital financial account platform that provides loan facilitation services and post-origination services, and we are not directly liable to investors or institutional funding partners for borrowers’ defaults of loans under our Online Lending Information Intermediary Services and our direct lending program, potential increase in borrower defaults could still have material adverse effect on our business relationships with our financial institution partners, merchant partners and other business partners and may potentially trigger material adverse changes in our business relationships with certain partners.  Furthermore, the payment or repayment ability or decision of our business partners and third-party borrowers may also be negatively affected since suspension of business activities across various sectors are likely to lead to a rise in unemployment, which could increase uncertainties relating to the collection of our receivables. Although we are trying to maintain effective communication channels with the affected business partners and third-party borrowers and take measures to protect our legal interest, we cannot assure you that potential disputes and litigations won’t be arise between us and certain affected business partners and third-party borrowers.  Such disputes and litigations, if any, could adversely affect our financial condition and results of operations. The population in most of the major cities was locked down to a greater or lesser extent and opportunities for discretionary consumption were extremely limited. As a result of the sharp slowdown in consumption activities, especially in leisure spending or outdoor entertainment, the growth of our loan origination volume may also significantly slow down due to a reducing demand for consumption loans. The other effects include the temporary closure of our offices, quarantine of certain of our employees and restrictions on our employees’ ability to travel. In addition, we believe that our business partners and suppliers such as our partners in the consumption sectors of travelling, home improvement, education and elective medical care service, are also experiencing similar or more serious disruptions to their business operation, which are expected to last for some time until the affected business partners and suppliers are fully recovered from the disruptions.  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, restrictions on the number of on-site employees, remote working arrangements and more stringent workplace sanitation measures, which may also have negative impact on our business operation. With China’s gradual recovery from the economic impact brought about by COVID-19, we have also been actively adjusting our business operations and further expanding our businesses such as online consumption, technology enablement related services, and online stock investment.  However, as a result of the above developments, our business and financial performance could be materially and adversely affected by the outbreak of COVID-19 in China since the beginning of 2020 and this is likely to continue throughout the current year, if not longer, given COVID-19 has now become a global pandemic. As of the date of this annual report, COVID-19 had an adverse effect on our operations which resulted in an increase in delinquency rates and a significant decrease in our revenues, loan origination volumes and active borrowers in the first five months of 2020, compared to the same period in 2019. For example, Loan origination volume and active borrowers decreased by approximately 79.5% and 64.2% in the first five months of 2020, compared to the same period in 2019.

 

While many of the restrictions on movement within China have been relaxed now, and we are adopting a series of measures to cope with the uncertainties and risks brought about by COVID-19, there is great uncertainty as to the future progress of the disease. Currently, there is no vaccine or specific anti-viral treatment for COVID-19. Relaxation of restrictions on economic and social life 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 or treat its impact, among others, all of which are beyond our control.

 

20


Table of Contents

 

We have established, and are actively expanding our operation in Southeast Asian countries. COVID-19 has caused significant disruptions to the economic development in Southeast Asian countries, which may weaken the debt repayment ability of borrowers of our lending business in these countries. Although our business operation in these countries are relatively small, and we have been actively pursuing technology enablement strategies to enable our business partners and financial institutions in Southeast Asia, the developments surrounding COVID-19 could still negatively affect our future development in this region.

 

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

 

In addition to COVID-19, our business could be materially and adversely affected by natural disasters, other health epidemics or other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide products and services on our platform.

 

Our business could also be adversely affected by the effects of epidemics. In recent years, there have been breakouts of epidemics in and outside China, such as Ebola virus disease, H1N1 flu, avian flu and the recent outbreak of COVID-19. Our business operations could be disrupted if any of our employees is suspected of having such epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.

 

Our headquarters are located in Beijing, where most of our directors and management and a large majority of our employees currently reside. In addition, most of our system hardware and back-up systems are hosted in Beijing and Hangzhou. We also conduct our online wealth management products related business from our Beijing headquarter and Hong Kong branches. Furthermore, we owned a building in Kashi to operate our One Card related business and a credit assessment center in Dalian. We conduct our stock investment businesses in Hong Kong with support provided by a research and development center in Shenzhen. Consequently, we are highly susceptible to factors adversely affecting Beijing, Hangzhou, Dalian, Kashi, Shenzhen and Hong Kong. If any of the abovementioned natural disasters, health epidemics or other outbreaks were to occur in Beijing, Hangzhou, Dalian, Kashi, Shenzhen and Hong Kong, our operation may experience material disruptions, such as temporary closure of our offices and suspension of services, which may materially and adversely affect our business, financial condition and results of operations.

 

If we are unable to successfully retain existing borrowers, investors, financial institution partners or merchant partners, attract new ones, and develop our direct lending program, our business and results of operations may be materially and adversely affected.

 

Attracting new users, financial institution partners and merchant partners is critical to the continued success of our business. However, potential users and partners who are not familiar with the industries we are operating in may not fully appreciate the value we can add. We strategically focus on serving the young generation and seek to cultivate user loyalty. Our ability to attract and retain users and partners largely depends on whether we can effectively address their needs. If there is insufficient demand for our loan products from borrowers, our loan origination volume could be negatively affected, and investors and institutional funding partners who are unable to deploy their funds in a timely or efficient manner may seek alternative investment opportunities. For example, since the COVID-19 pandemic resulted in a sharp slowdown in consumption activities, especially in leisure spending or outdoor entertainment, the growth of our loan origination volume may also significantly slow down due to a reducing demand for consumption loan. See “—Our business, financial condition and results of operations have been and are likely to continue to be materially and adversely affected by the outbreak of COVID-19.” Conversely, without sufficient commitments from investors and institutional funding partners, borrowers may turn to other sources for their borrowing needs and merchant partners may turn to our competitors for funding. If we cannot attract and retain qualified borrowers and secure sufficient commitments from investors and institutional funding partners or if borrowers and investors participate in transactions on our platform less actively, our business and results of operations may be materially and adversely affected. In addition, recent regulatory environment including the tightened regulatory framework limiting the growth of online lending platforms has negatively affected, and may continue to, negatively affect our business growth such as the growth of our business scale, number of users, loan facilitation amount and outstanding loan balance.

 

21


Table of Contents

 

Moreover, we depend on our existing user base to cultivate user loyalty, accumulate user data and credit history, grow with our users and offer them better products and services. If we fail to retain our existing borrowers, investors and institutional funding partners, or if we fail to retain these borrowers, investors and institutional funding partners by offering products and services that cater to their evolving consumption needs, we may not be able to capture their long-term growth potential, and our business and results of operations may be adversely affected.

 

We believe the amount of transactions on our platforms may be negatively affected by the loss of trust in us, which may be triggered by either the failure of us to serve our users or negative publicity about us, among other reasons. Please see “Risk Factors—Risks Related to Our Business and Industry—Any negative publicity with respect to us, the industries we are operating in in general and our partners may materially and adversely affect our business and results of operations.” If, for any reason, we suffer a loss of trust from our users and partners, we may not be able to capture their long-term growth potential, and our business and results of operations may be adversely affected.

 

If we are not able to respond to changes in user preferences for our products and services and provide a satisfactory user experience on our platform, or our existing and new products and services do not maintain or achieve sufficient market acceptance, we will not be able to maintain and expand our user base and increase user activities, and our financial results and competitive position will be harmed.

 

We believe that our user base is the cornerstone of our business. Our ability to maintain and expand our user base depends on a number of factors, including our ability to offer suitable loan products or online wealth management products for our users, our ability to develop other products and services, and our ability to provide relevant and timely products and services to meet changing user needs. If we are unable to respond to changes in user preference and deliver satisfactory and distinguishable user experience, our users may switch to competing platforms or obtain the relevant products and services directly from their providers. As a result, user access to and user activity on our platform will decline, our products and services will be less attractive to our users, and our business, financial performance and prospects will be materially and adversely affected.

 

Furthermore, fixed income products currently constitute a significant portion of the online wealth management products we offer, which we cannot guarantee will continuously attract investors. The number of active investors decreased from 1.2 million in 2017 to 0.9 million in 2018, and further decreased to 0.5 million in 2019 due to the challenging regulatory environment negatively affecting the growth of our business. If the market acceptance of the fixed income products offered by us, or the fixed income products in general, declines, and we fail to retain our investors by developing and promoting our other wealth management products as alternative investment portfolio options for investors, we may suffer a loss of our investor base, and our business, operation results and financial status will be adversely impacted.

 

We have devoted significant resources to, and will continue to emphasize on, upgrading and marketing our existing loan products, such as the direct lending program and online wealth management products and enhancing their market awareness. We also incur expenses and expend resources upfront to develop, acquire and market new loan products, online wealth management products and other products and services that incorporate additional features, improve functionality or otherwise make our products more desirable to borrowers and investors. New products must achieve high levels of market acceptance in order for us to recoup our investment in developing, acquiring and bringing them to market.

 

Our existing and new loan products and online wealth management products could fail to attain sufficient market acceptance for many reasons, including:

 

·                  borrowers may not find terms of our loan products, such as borrowing costs and credit limit, competitive or appealing;

 

·                  investors or institutional funding partners are not willing to deploy their funds in a timely or efficient manner;

 

22


Table of Contents

 

·                  we may fail to predict market demand accurately and provide loan products or online wealth management product that meet this demand in a timely fashion;

 

·                  users may not like, find useful or agree with, any changes;

 

·                  there may be defects, errors or failures on our platform;

 

·                  there may be negative publicity about our loan products and online wealth management products or our platform’s performance or effectiveness;

 

·                  regulatory authorities may take the view that the existing and new loan products and online wealth management products or changes to our platform do not comply with PRC laws, regulations or rules applicable to us; and

 

·                  there may be competing products and services introduced or anticipated to be introduced by our competitors.

 

If our existing and new loan products, online wealth management products and other products and services do not achieve adequate acceptance in the market, our competitive position, results of operations and financial condition could be harmed.

 

If we fail to secure adequate funding from investors and institutional funding partners at a reasonable cost to maintain sufficient liquidity, our reputation, results of operations and financial condition may be materially and adversely affected.

 

The growth and success of our operations depend on the availability of adequate funding to meet borrower demand for loans on our platform. We derive our funding from a variety of sources including investors and our institutional funding partners and intend to cooperate with more institutional funding partners to further diversify our funding sources. To the extent there is insufficient funding from investors or institutional funding partners willing to accept the risk of delinquency posed by potential borrowers or the particular type of funding could be matched to only certain group of our borrowers due to restrictions imposed by current or existing laws or regulations, loans originated by us may be significantly impacted. Also, to the extent that the funding sources’ risk appetite changes, funding sources may choose not to fund loans originated by us.

 

In addition, powered by our automated investing tools, we offer investors a variety of fixed income products consisting of loan portfolios featured with different investment commitment periods, expected rates of return and minimum investment balances. If an investment commitment period ends during the term of an underlying loan, we will facilitate the investor’s exit on the investor’s behalf by transferring his or her investor’s rights with respect to the underlying loans. There is no guarantee that the transfer of the underlying loans at the end of the investment commitment period will be arranged successfully. In addition, if a cash-out request is made by an investor within the investment commitment period, we have discretion to handle the transfers of the loans on a case-by-case basis. Before October 2019, if the transfers were arranged successfully, the investor would receive the principal and the accrued interests as determined by their actual investment period, and we would charge the investors service fees for early termination. Since October 2019, if a cash-out request made by an investor within the investment commitment period meets our pre-set conditions such as humanism or system failure, and the loan transfer is therefore arranged successfully, the investor would only receive the principal, while we would not charge service fees for early termination. For both scenarios, there is no guarantee that any loan transfers will be successfully arranged. The smooth operations of our investment products require sufficient liquidity consistently. In the event that investors request to withdraw a substantial amount of their investments at the same time or within a short time period, it may cause a run on our investment products. Although we have developed sophisticated algorithm and system to match the invest-in and cash-out requests among the investors to provide liquidity, we cannot guarantee that we will be able to maintain the liquidity at a sufficient level that every cash-out request from our investors who subscribe for our fixed income products can be met. While making no guarantees to meet the cash-out request made by the investors, we may suffer damage to our investor recognition if we turn down most of such cash-out request, which could materially and adversely impact our results of operations.

 

23


Table of Contents

 

The smooth operations of our business require sufficient liquidity on a consistent basis. However, if any of the risks described above were to occur, our reputation, results of operations, financial condition and business prospect may be materially and adversely affected.

 

We may not be able to maintain our current level of fee rates and any material reduction in our fee rates will decrease our profitability and cause material and adverse impact on our business, results of operations and financial condition.

 

We earn a substantial majority of our revenues from the service fees that we collect from our borrowers,  investors and financial institution partners for our loan facilitation services and post-origination services. We may not be able to maintain the current service fee rates due to more intense competition in the future. These fee rates may also be subject to change based on the prevailing political, economic, regulatory, taxation and competitive factors. Any material reduction in our fee rates could have a material adverse effect on our business, results of operations and financial condition.

 

If we are unable to maintain low delinquency rates for loans originated to our borrowers, our business, financial conditions and results of operation may be materially and adversely affected.

 

Loan delinquency rates may be significantly affected by factors beyond our control or beyond the control of the borrowers. Our borrowers are individuals who may expose investors and institutional funding partners to greater credit risks than larger, better-capitalized institutional borrowers with established track records. The types of borrowers we serve also generally have fewer financial resources than more established entities to weather a downturn in the economy. Conditions such as inflation, economic downturn, local policy change, adjustment of industrial structure, health epidemics, natural disasters and other factors beyond our control may increase the delinquency rates for such borrowers. For example, the recent outbreak of COVID-19 may weaken the debt repayment ability of borrowers for loans under our Online Lending Information Intermediary Services and our direct lending program, which could result in increased borrower defaults. See “—Our business, financial condition and results of operations have been and are likely to continue to be materially and adversely affected by the outbreak of COVID-19.” Furthermore, the unsecured nature of a majority of the loans facilitated by us may cause larger losses to investors in the event of increased delinquency rates as compared with secured loans.

 

We aim to reduce the loan delinquency rates through our ability to implement and maintain an effective credit risk management system. We have established extensive risk management policies and procedures that seek to mitigate the riskiness of the loans we facilitate. See “Item 4. Information on the Company—B. Business Overview —Risk Management.” However, as we have a relatively short operating history in the industries we are currently operating in, our historical experience may not provide a sufficient basis for us to evaluate and maintain the effectiveness of our risk management system at all times. The risk management procedures and policies we have in place may not anticipate unforeseen risks or the magnitude of potential losses that may be caused by the unforeseen risks. Our credit scoring models might not be adequate in effectively evaluating the credit risk of prospective borrowers. In addition, if a borrower’s financial condition deteriorates after his or her loan application is approved, we may not be able to take measures to prevent delinquency on the part of the borrower and thereby maintain a reasonably low delinquency rate for loans facilitated by us. Furthermore, if our ability to collect delinquent loans is impaired, our business and results of operations may be materially and adversely affected. Please see “—Risks Related to Our Business and Industry—If our ability to collect delinquent loans is impaired, our business and results of operations might be materially and adversely affected.”

 

Because investment in loans facilitated by us involves inherent risks, we are unable to completely eliminate borrowers’ delinquent despite various preventive and investor protection measures we have taken or will take. For example, subject to credit assessment result for each loan application, a borrower is allowed to take out multiple loans at a time on our platform if the total outstanding balance is within the approved credit limit for the specific borrower. As such, it is possible that borrowers may take out new loans on our platform to pay off their other existing loans facilitated by us or for other purposes. Given the practical difficulty in tracking and controlling the usage of borrowed funds, we are not able to effectively prevent borrowers from “rolling over” their loans facilitated by us. Furthermore, human errors on the part of our employees or agents to correctly follow our procedures may unpredictably cause us to render the wrong decisions on borrower applications. If our risk management policies and procedures turn out to be ineffective or if we fail to effectively implement or our employees and agents fail to correctly carry out such policies and procedures, the delinquency rate of loans facilitated by us might increase. If that is the case, even if we have a safety net of mechanisms such as the arrangement with the financing guarantee company and the insurance companies, the affected investors will still have concerns on the quality of our borrowers, and our business, financial condition and results of operations may be materially and adversely affected.

 

24


Table of Contents

 

Since November 2019, under our Online Lending Information Intermediary Services, new loans with terms of no more than 12 months are no longer covered by PICC’s insurance protection plan. We have also suspended our cooperation with PICC on new loans under our direct lending program since December 2019. We currently cooperate with Zhongtian Guarantee, a financing guarantee company under our Online Lending Information Intermediary Services, and cooperate with financing guarantee companies under our direct lending program. However, as Zhongtian Guarantee only has limited guarantee obligations to repay the investors, if the loan delinquency rate on our platform is higher than expected, the affected investors may not get fully compensated or may not get compensated at all and will suffer the losses on their investments accordingly. An increase in the delinquency rates for loans facilitated by us may also reduce the financial returns to our investors in general and make products and services offered by us appear riskier to potential investors, thereby damaging our reputation and reducing the amount of funds available for lending on our platform, which would further harm our business and results of operations. Also, under our direct lending program, we currently cooperate with financing guarantee companies to provide guarantee protection to institutional funding partners, whereby two financing guarantee companies provided guarantee protection to approximately 96.7% of the total loan origination volume under our direct lending program for the first five months of 2020. If we fail to retain Zhongtian Guarantee under our Online Lending Information Intermediary Services, or fail to retain one of such financing guarantee companies under our direct lending program, our business and results of operations could be materially and adversely affected.  In addition, investors or institutional funding partners may perceive protections provided by financing guarantee companies inferior to PICC’s insurance protection, which may make our services less attractive to investors or institutional funding partners, which may negatively affect our services and our business and results of operations could be materially and adversely affected.

 

Credit and other information that we receive from prospective borrowers and third parties about a borrower may be inaccurate, outdated or may not accurately reflect the borrower’s creditworthiness, which may compromise the accuracy of our credit assessment.

 

For the purpose of credit assessment, we obtain information from the prospective borrowers. We also leverage the information from the third parties to verify the information provided by the prospective borrowers in compliance with industry practice. Those information, however, may not be complete, accurate or reliable. A credit score assigned to a borrower may not reflect that particular borrower’s actual creditworthiness because the credit score may be based on incomplete or inaccurate borrower information. Additionally, we are subject to the credit cycle and the risk of deterioration of the credit profile of the borrowers. For example, once we have obtained a borrower’s information, the borrower may subsequently (i) become delinquent in the payment of an outstanding obligation; (ii) delinquent on a pre-existing debt obligation; (iii) take on additional debt; or (iv) sustain other adverse financial events, making the information we have previously obtained outdated. In addition, we often do not verify a borrower’s intended use of loan proceeds after disbursement of loan proceeds, and the borrower may use loan proceeds for other purposes with increased risk than as originally provided. If investors invest in loans through our platform based on information supplied by borrowers that is inaccurate, misleading or incomplete, those investors may not receive their expected returns and our reputation may be harmed. We determine whether borrowers have additional outstanding loans using external databases at the time they apply for a loan through our platform. We also review borrower records in the databases on a regular basis. However, due to the lack of an industry-wide information sharing arrangement, we may not be aware of all outstanding debts of a borrower and the other investors or platforms face the same challenge. As a result, it is likely that a borrower may borrow money through our platform in order to pay off the loans on other platforms and vice versa. If a borrower incurs additional debt before fully repaying any loan such borrower takes out on our platform, 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 investment returns associated with such loan. In addition, the additional debt may adversely affect the borrower’s creditworthiness generally, and could result in the financial distress or insolvency of the borrower. To the extent that a borrower has or incurs other indebtedness and cannot repay all of his or her indebtedness, the obligations under the loans will rank pari passu to each other and the borrower may choose to make payments to other creditors rather than to investors on our platform.

 

25


Table of Contents

 

In addition, such inaccurate, outdated or incomplete borrower information could compromise the accuracy of our credit assessment and adversely affect the effectiveness of our risk management, which could in turn increase the delinquency rates of the transactions on our platform and harm our reputation.

 

If our ability to collect delinquent loans is impaired, our business and results of operations might be materially and adversely affected.

 

Our failure to collect the delinquent loan will make our platform appears riskier to the investors and institutional funding partners, and will harm our reputation. We primarily rely on third-party collection companies to assist us with payment collection from time to time. If our collection methods or the collection methods adopted by third-party collection companies, such as text message reminders, phone calls and legal letters, are not as effective as they were and we, or the third-party collection companies fail to respond quickly and improve the collection methods, our delinquent loan collection rate may decrease and our investors and institutional funding partners may suffer loss. If those collection methods are viewed by the borrowers or regulatory authorities as harassments, threats or other illegal conducts, we, or the third-party collection companies may be subject to lawsuits initiated by the borrowers or prohibited by the regulatory authorities from using certain collection methods. If this were to happen and alternative collection methods are not adopted in a timely manner or the alternative collection methods are proven not effective, we might not be able to maintain our delinquent loan collection rate and the investors’ confidence in our platform may be negatively affected. In addition, we currently rely on a number of collection companies to collect the delinquent loans. The collection companies undertake on the quality of their collection and also ensure their collection practice is in compliance with the relevant laws and regulations. If we decide not to cooperate with any of such third-party collection companies due to their unsatisfactory performance or noncompliant behavior, and if we are not able to find an alternative in a timely and cost-efficient manner or at all, our delinquent loan collection rate may decrease and our investors and institutional funding partners may suffer loss. If any of the foregoing takes place and impairs our ability to collect delinquent loans, the transaction volumes on our platform will decrease and our business and results of operations could be materially and adversely affected.

 

Loss of or failure to maintain relationship with our partners or implement our strategy to develop new relationships with other potential partners may materially and adversely affect our business and results of operations.

 

We currently rely on a number of partners in various aspects of our business. For example, we acquire borrowers from the merchant partners we work with, and diversify our funding sources by working with more institutional funding partners. We also cooperate with other types of partners across functions. See “Item 4. Information on the Company—B. Business Overview—Our Users and Partners—Our Other Partners.” We anticipate that we will continue to leverage strategic relationships with existing partners to grow our business while pursuing new relationships with additional partners.

 

Pursuing, establishing and maintaining relationships with partners require significant time and resources as does integrating third-party data and services with our system. Our current agreements with partners generally do not prohibit them from working with our competitors or from offering competing services. Our competitors may be more effective in providing incentives to our partners to favor their products or services, which may in turn reduce the volume of loans facilitated by us or make or products and services less attractive to our partners. In addition, certain partners may suspend or terminate its cooperation with us. Furthermore, certain types of partners may build their in-house solutions and devote more resources to support their own competing businesses. In addition, these partners may not perform as expected under our agreements with them, and we may have disagreements or disputes with them, which could adversely affect our brand and reputation. For example, since November 2019, under our Online Lending Information Intermediary Services, new loans with terms of no more than 12 months are no longer covered by PICC’s insurance protection plan. We have also suspended our cooperation with PICC on new loans under our direct lending program since December 2019. We currently cooperate with Zhongtian Guarantee, a financing guarantee company under our Online Lending Information Intermediary Services, and cooperate with financing guarantee companies under our direct lending program. See “— If we are unable to maintain low delinquency rates for loans originated to our borrowers, our business, financial conditions and results of operation may be materially and adversely affected.” In addition, the payment or repayment ability or decision of our business partners and third-party borrowers may be negatively affected by impact brought about by COVID-19, which could increase uncertainties relating to the collection of our receivables, and may lead to potential disputes and litigations between us and certain affected business partners and third-party borrowers. See “—Our business, financial condition and results of operations have been and are likely to continue to be materially and adversely affected by the outbreak of COVID-19.” If we cannot successfully enter into and maintain effective strategic relationships with partners, our business will be harmed.

 

26


Table of Contents

 

In addition, if any of our partners decides to suspend or terminate its cooperation with us, or fails to perform properly, we cannot assure you that we will be able to find an alternative in a timely and cost-efficient manner or at all.  For example, we may not be able to develop insurance protection model under our Online Lending Information Intermediary Services or direct lending program similar to the previous insurance protection models with PICC. Any of these occurrences could result in our diminished ability to operate our business, potential liability to our users and partners, inability to attract users and partners, reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results of operations and could negatively affect the value of your investment.

 

We may not be able to ensure the accuracy of the third-party product information and the authenticity of third-party wealth management products on our platform, and we have limited control over performance of investment products we distribute.

 

We offer other onshore and offshore investment products such as stock investments, insurance, bank wealth management products and fund investment products. The underlying wealth management products are offered by third-parties. The acceptance and popularity of our platform is partially premised on the reliability of the relevant underlying wealth management products and information on our platform. We rely on the relevant third-party providers of the relevant wealth management products for the authenticity of their underlying products and the comprehensiveness, accuracy and timeliness of the related financial information. While the products and information from these third-party providers have been generally reliable, there can be no assurance that the reliability can be maintained in the future. If these third-party providers or their agents provide inauthentic financial products or incomplete, misleading, inaccurate or fraudulent information, we may lose the trust of existing and prospective investors. In addition, if our investors purchase the underlying wealth management products that they discover on our platform and they suffer losses, they may blame us and attempt to hold us responsible for their losses, even though we have made risk disclosures before they invest. Our reputation could be harmed and we could experience reduced user traffic to our platform, which would adversely affect our business and financial performance.

 

Furthermore, as investors access the underlying wealth management products through our platform, they may have the impression that we are at least partially responsible for the quality of these products. Although we have established standards to screen products providers before selling their products on our platform, we have limited control over performance of the investment products we distribute. In the event that an investor is dissatisfied with underlying products or the services of a products provider, we do not have any means to directly make improvements in response to user complaints. If investors become dissatisfied with the underlying wealth management products available on our platform, our business, reputation, financial performance and prospects could be materially and adversely affected.

 

Some users may come to our platform from referrals of third parties, which could expose us to risks associated with such third parties.

 

Some users may be referred to our platform after receiving and reviewing the information provided by a third party. We do not verify, validate or modify any information provided by third-party websites and, while we do not believe we would have liability for such information, it is possible that an unsatisfied user could bring claims against us based on such information. Such claims could be costly and time-consuming to defend and would distract management’s attention from the operation of our business and create negative publicity, which could harm our business and affect our reputation. In addition, if the business operation of such third parties deteriorate, the unsatisfied users may associate our company with such third parties, which could harm our business and affect our reputation.

 

27


Table of Contents

 

Our online wealth management products are subject to risks related to lawsuits and other claims brought by our investors.

 

We may be subject to lawsuits and other claims in the ordinary course of providing online wealth management products to our investors. Investors generally authorize us to choose borrowers on their behalf. We may face arbitration claims and lawsuits brought by investors based on our loan matching which turned out to be unsuitable. We may also be subject to claims for failing to provide sufficient information on investment risks or for failing to provide access to such relevant information in a manner that is clear and readily accessible to investors. We may also be subject to claims against us in connection with investment products for delays in identifying suitable corresponding loans, which risk may be heightened during periods when credit, equity or other financial markets are deteriorating in value or are volatile, or when investors experience losses. Actions brought against us may result in settlements, awards, injunctions, fines, penalties or other results adverse to us including harm to our reputation and our results of operations.

 

Even if we are successful in defending against these actions, the defense of such matters may result in our incurring significant expenses, divert management attention and damage our reputation. See also “—If we fail to promote and maintain our brand in a cost-efficient way, we may lose market share and our revenue may decrease.”

 

Misconduct, errors and failure to function 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 interact with potential borrowers, investors, institutional funding partners and other partners we collaborate with, process large numbers of transactions and support the loan collection process, all of which involve the use and disclosure of personal information. We could be materially adversely affected if transactions were redirected, misappropriated or otherwise improperly executed, if personal information was disclosed to unintended recipients or if an operational breakdown or failure in the processing of transactions occurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of our operations or systems. In addition, the manner in which we store and use certain personal information and interact with borrowers, investors and partners through our platform is governed by various PRC laws. 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. 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. 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. Furthermore, we use third-party loan collection companies for loan collection services.

 

Aggressive practices or misconduct by such third-party loan collection companies in the course of collecting loans could damage our reputation.

 

Any failure by our third-party service providers to comply with applicable anti-money laundering and anti-terrorism financing laws and regulations could damage our reputation.

 

Currently, we rely on our third-party service providers, in particular the custodian bank and payment companies that handle the transfer of funds between borrowers and investors, to have their own appropriate anti-money laundering policies and procedures. The custodian bank and payment companies are subject to anti-money laundering obligations under applicable anti-money laundering laws and regulations and are regulated in that respect by the People’s Bank of China, or the PBOC. If any of our third-party service providers fails to comply with applicable anti-money laundering laws and regulations, our reputation could suffer and we could become subject to regulatory intervention, which could have a material adverse effect on our business, financial condition and results of operations.

 

In addition, the Interim Measures and the Administrative Measures for Anti-money Laundering and Counter-terrorism Financing by Internet Finance Service Agencies (for Trial Implementation) promulgated by relevant government authorities have imposed on us the obligation of anti-money laundering and anti-terrorism financing, including the verification of customer identification, the reporting of suspicious transactions, and the preservation of customer identification information and transaction records. While we have formulated and adopted policies and procedures, including internal controls and “know-your-customer” procedures, aimed at preventing money laundering and terrorism financing, we cannot assure you that the anti-money laundering and anti-terrorism financing policies and procedures we have adopted will be effective in protecting our platform from being exploited for money laundering or terrorism financing purposes or will be deemed to be in compliance with applicable anti-money laundering and anti-terrorism financing laws and regulations, including the Interim Measures.

 

28


Table of Contents

 

We may be subject to claims under consumer protection laws, including health and safety claims and product liability claims, if property or people are harmed by the merchandise offered by us.

 

Our proprietary online shopping platform 9F One Mall allows users to buy merchandise from third-party merchandise suppliers, and some of such merchandise may be defectively designed or manufactured.

 

We are subject to consumer protection laws. As a result, offerings of defective merchandise could expose us to product liability claims relating to personal injury or property damage and may require product recalls or other actions. Operators of e-commerce platforms are subject to certain provisions of consumer protection laws even where such operator is not the manufacturer or provider of the products or services purchased by the consumer. For example, under applicable consumer protection laws in China, e-commerce platform operators may be held liable for consumer claims relating to damages if such operators are unable to provide consumers with the true name, address and contact details of the sellers or the service providers. In addition, if we do not take appropriate remedial action against merchants for actions they engage in that we know, or should have known, would infringe upon the rights and interests of consumers, we may be held jointly liable for infringement alongside the merchants. Moreover, applicable consumer protection laws in China provide that platforms will be held liable for failing to meet any undertakings that the platforms make to consumers with regard to products listed on the platforms. We may also be held jointly liable with merchants who do not possess the proper licenses or authorizations to sell goods or sell goods that do not meet product standards. Third parties subject to such injury or damage may bring claims or legal proceedings against us. In addition, we may face activist litigation in China by plaintiffs claiming damages based on consumer protection laws, which may result in increased costs in defending such suits and damages should we not prevail, which could materially and adversely affect our reputation and brands and our results of operations. We do not maintain product liability insurance for merchandise offered on our platform, and our rights of indemnity from these third-party merchandise suppliers, if any, may not adequately cover us for any liability we may incur. As a result, any material product liability claim or litigation could have a material and adverse effect on our business, financial condition and results of operations. Even unsuccessful claims could result in the expenditure of funds and management time and resources and could materially reduce our net income and profitability.

 

Furthermore, our agreements with these third-party merchandise suppliers may not include clauses that indemnify us for any losses we may suffer or any costs we may incur due to any merchandise as a result of our suppliers’ breach, and we may not be able to successfully enforce our contractual rights and may need to initiate costly and lengthy legal proceedings in China to protect our rights.

 

Fluctuations in interest rates could negatively affect our business.

 

The profitability of our business depends on the interest and fee rates at which our borrowers are willing to borrow, and the interest and fee rates at which our investors are willing to lend, subject to limitations of PRC laws and regulations. We have taken measures to aim to react to the fluctuations in the interest rate environments. However, if we fail to respond to the fluctuations in interest rates in a timely manner and reprice our loan products, our loan products may become less attractive to our investors and institutional funding partners. For example, in a falling interest rate environment, potential borrowers may seek lower priced loans from other channels if we do not lower the interest and fee rates on our loan products. Similarly, if we fail to respond to fluctuations in interest rates in a timely manner and reprice our online wealth management products, our online wealth management products may lose competitiveness. For example, in a rising interest rate environment, potential investors or institutional funding partners may seek higher return investments from other channels. Moreover, if we are unable to reprice our loan products and online wealth management products correspondingly, the spreads between the interest and fee rates on our loan products and the interest and fee rates on our investment services may be reduced, and our profitability may be adversely affected.

 

29


Table of Contents

 

Any negative publicity with respect to us, the industries we are operating in in general and our partners may materially and adversely affect our business and results of operations.

 

Reputation of our brand is critical to our business and competitiveness. Factors that are vital to our reputation include but are not limited to our ability to:

 

·                  maintain the quality and reliability of our platforms;

 

·                  provide borrowers, investors, institutional funding partners and our other partners with a superior experience;

 

·                  enhance and improve our credit assessment and risk-pricing models;

 

·                  effectively manage and resolve borrower and investor complaints; and

 

·                  effectively protect personal information and privacy of borrowers and investors.

 

Any malicious or negative allegation made by the media or other parties about the foregoing or other aspects of our company, including but not limited to our management, business, compliance with law, financial condition or prospects, whether with merit or not, could severely compromise our reputation and harm our business and operating results.

 

As the industries we are operating in are new and the regulatory framework for these industries is also evolving, negative publicity about these industries may arise from time to time. Negative publicity about the industries we are operating in in general may also have a negative impact on our reputation, regardless of whether we have engaged in any inappropriate activities. The PRC government has instituted specific rules in the past a few years, including but not limited to the Internet Finance Guidelines, the Interim Measures, the Funds Custodian Guidelines, the Information Disclosure Guidelines and the Compliance Inspection Notice, to develop a more transparent regulatory environment for the industries we are operating in. See “ Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to our Business Operation in China—Regulations Related to Online Lending Information Intermediary Services.” Any players in the industries we are operating in who are not in compliance with these regulations may adversely impact the reputation of the industries as a whole. Furthermore, any negative development in, or negative perception of, the industries we are operating in as a whole, even if factually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established and impose a negative impact on our ability to attract new borrowers and investors. Negative developments in the industries we are operating in, such as widespread borrower defaults, fraudulent behavior and/or the closure of other online lending, may also lead to tightened regulatory scrutiny of the sector and limit the scope of permissible business activities that may be conducted by other online lending platforms like us. For instance, since the second quarter of 2018, in response to the tightened regulatory framework and the challenging macro-economic conditions in China, there were an increasing number of reports of business failures of, or accusations of fraud and unfair dealing against, certain companies in the online lending industry in China. Recently there has been increased media coverage of marketplace lending platforms business failures. Although the market exits of these companies may result in more healthy and stable development of the industries we are operating in, to the extent borrowers, investors, financial institution partners or our merchant partners associate our company with these companies, they may be less willing to participate on our platform. Under such a challenging regulatory environment, investors’ willingness to invest on our platform declined, and our loan origination volume and fixed income investment volume both decreased in 2018 compared to that in 2017. Starting in the second half of 2018, PRC government commenced implementing monetary and fiscal policies to provide more liquidity to the market, which to some extent alleviated investors’ concerns, and the number of such news reports started to subside. As a result, our loan origination volume increased in 2019 as compare to 2018, even though our fixed income investment volume further decreased in 2019 due to the tightened regulatory environment. There is still substantial uncertainty with respect to PRC regulatory environment in this field, and we cannot assure you that similar negative news reports will not appear again in the future.

 

In addition, negative publicity about our partners, outsourced service providers or other counterparties, such as negative publicity about their loan collection practices and any failure by them to adequately protect the information of our borrowers and investors, to comply with applicable laws and regulations or to otherwise meet required quality and service standards could harm our reputation. If any of the foregoing takes place, our business and results of operations could be materially and adversely affected.

 

30


Table of Contents

 

Fraudulent activity on our platform could negatively impact our operating results, brand and reputation.

 

We are subject to the risk of fraudulent activity both on our platform and associated with borrowers, investors and third parties handling borrower and investor information. Our resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. Significant increases in fraudulent activity could negatively impact our brand and reputation, cause loss to investors and reduce the volume of loans facilitated by us. We may also find it necessary to take additional steps to reduce fraud risk, which could increase our costs and expenses. For example, if some illegitimate investors engage in activities such as identity theft and fraudulent lending, borrowers will walk away from obtaining funding from such sources. The reputation of the entire industry could be harmed and the borrowers will stop borrowing money on our platform and may turn to traditional channels such as banks. High profile fraudulent activity could even lead to regulatory intervention, and may divert our management’s attention and cause us to incur additional expenses and costs. If any of the foregoing were to occur, our results of operations and financial condition could be materially and adversely affected.

 

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 be subject to liabilities.

 

Our business of connecting investors and borrowers constitutes an intermediary service, and our contracts with investors and borrowers are intermediation contracts under the PRC Contract Law. Under the PRC Contract Law, an intermediary that intentionally conceals any material information or provides false information in connection with the conclusion of an intermediation contract, which results in harm to the client’s interests may not claim for any service fee for its intermediary services, and is liable for any damage incurred by the client. Therefore, if we fail to provide material information to investors and are found to be at fault, for failure or deemed failure to exercise proper care, 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 on online lending information intermediaries, including us, additional obligations to verify the truthfulness of the information provided by or in relation to loan applicants and to actively detect fraud. We leverage a large database of past fraud accounts information and sophisticated rule-based detection technology in detecting fraudulent behaviors. Based on new data collected and fraudulent behaviors detected during our daily business operations, we update our database on a regular basis. As the Interim Measures are relatively new, there are regulatory uncertainties as to what extent online lending information intermediaries should exercise care in detecting fraud. 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.

 

Our failure to compete effectively could adversely affect our results of operations and market share.

 

The industries we are operating in are competitive and evolving. We compete with financial products and companies that attract borrowers and investors, partners or all of these. With respect to loan products, we compete with market players such as traditional financial institutions, small loan companies, e-commerce driven installment platforms and other independent consumer finance platforms; with respect to online wealth management products, we complete with market players such as internet ecosystem owners providing cash management and quasi fixed income products, online third-party financial brokers and information providers, and marketplace lending platforms.

 

Our competitors may operate with different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our current and 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 development. Our competitors may also have more extensive borrower or investor bases, a more extensive base of institutional funding partners, greater brand recognition and brand loyalty and broader partner relationships than us. Additionally, a current or potential competitor may acquire one or more of our existing competitors or form a strategic alliance with one or more of our competitors. Any of the foregoing could adversely affect our business, results of operations, financial condition and future growth. In addition, our competitors may be better at developing new products, responding faster to new technologies and undertaking more extensive marketing campaigns. 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 prevalent in that market, which could adversely affect our market share or ability to exploit new market opportunities. Our pricing and terms could deteriorate if we fail to act to meet these competitive challenges. Furthermore, to the extent that our competitors are able to offer more attractive terms to our partners, such partners may choose to terminate their relationships with us.

 

31


Table of Contents

 

In addition, the industries we are operating in are subject to rapid and significant technological changes. In order to compete in our industries and pursue our technology enablement strategies, we need to continue to make significant investments in developing technologies across all areas of our business, such as artificial intelligence, risk management and security, and other emerging new technologies. Incorporating new technologies into our products and services may require substantial expenditures and take considerable time, and ultimately may not be successful. If we are unable to compete effectively and meet the need for innovation in the industries we are operating in, the demand for our products and services could stagnate or substantially decline, we could experience reduced revenues or our platform could fail to achieve or maintain more widespread market acceptance, any of which could harm our business and results of operations.

 

If we fail to promote and maintain our brand in a cost-efficient way, we may lose market share and our revenue may decrease.

 

We believe that developing and maintaining the awareness of our brand is critical to achieving widespread acceptance of our products and services, gaining trust in our brand and attracting new borrowers, investors, financial institution partners and merchant partners to our platform. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts, the success of the channels we use to promote our platform, and the user experience we provide on our platform. Historically, our efforts to build our brand have incurred significant expense, and it is likely that our future marketing efforts will require us to incur significant additional marketing expenses. In 2017, 2018 and 2019, our sales and marketing expenses were RMB2,243.7 million, RMB1,746.4 million and RMB2,278.3 million (US$327.3 million), respectively. These brand promotion activities may not increase our revenues immediately or at all, and, even if they do, any revenue increases may not offset the expenses we incur to promote our brand. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand image, we may lose our existing users to our competitors or be unable to attract new users, which may cause our revenue to decrease and negatively impact our business and results of operations.

 

If we fail to manage our growth effectively, our business may be materially and adversely affected.

 

Our growth has placed, and will continue to place, a significant strain on our management, personnel, systems and resources. Our success will depend in part on our ability to manage the growth we achieve effectively. To accommodate our growth, we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems. For example, the number of borrowers and investors and the volume of loans facilitated through our platform will need to increase in order for us to continue our growth in the future, which will require us to expand our facilities and infrastructure and increase our personnel to accommodate the greater servicing obligations and demands on our platform. To expand our user base and transaction volume, we are also subject to greater exposure to loan delinquency risk. Such expansion may also increase our expose to liquidity risk. To accommodate our growth, we also need to continue to hire, train and manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed. The addition of new employees and the system development that we anticipate will be necessary to manage our growth will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.

 

If we are unable to effectively enhance the capacity of our platform and maintain the necessary infrastructure and personnel to provide a larger user base with the same quality services that our users have come to expect from us, the transaction volume through our platform will be significantly affected, and our operating results will be materially and adversely harmed. People may not continue to trust our platform as a credible source of funding and investment. We may not be able to continue to convince and attract potential new borrowers, investors, financial institution partners and our merchant partners of the value of our services because they may consider our platform to be highly risky and unreliable.

 

32


Table of Contents

 

We operate in a market where the credit infrastructure is still at an early stage of development.

 

China’s credit infrastructure is still at an early stage of development. The Credit Reference Center established by the PBOC in 2002 has been the only credit reporting system in China. This centrally managed nationwide credit database operated by the Credit Reference Center only records limited credit information, such as tax payments, civil lawsuits, foreclosure and bankruptcy. Moreover, this credit database is only accessible to banks and a limited number of market players authorized by the Credit Reference Center and does not support sophisticated credit scoring and assessment. In 2015, the PBOC announced that it would open the credit reporting market to private sectors with a view to spurring competition and innovation, but it may be a long-term process to establish a widely-applicable, reliable and sophisticated credit infrastructure in the market where we operate.

 

The origination of loans on our platform could give rise to liabilities under PRC laws and regulations that prohibit illegal fundraising and unauthorized public offerings.

 

PRC laws and regulations prohibit persons and companies from raising funds by 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 State Administration for Industry and Commerce (currently known as the State Administration for Market Regulation), or the SAIC, and other governmental authorities, and can lead to civil or criminal lawsuits.

 

The PRC Securities Law prohibits the issuance of securities for public offering without obtaining prior approval in accordance with the provisions of the law. The following offerings are deemed to be public offerings under the PRC Securities Law: (i) offering of securities to non-specific targets; (ii) offering of securities to more than 200 specific targets; and (iii) other offerings provided by the laws and administrative regulations. Additionally, private offerings of securities may not be carried out through advertising, open solicitation and disguised publicity campaigns. If any transaction between a borrower and multiple investors is identified as a public offering by PRC government authorities, we may be subject to sanctions under PRC laws and our business may be adversely affected.

 

We have taken measures to avoid conducting any activities that are prohibited under the illegal-fundraising related laws and regulations. For our Online Lending Information Intermediary Services, we act as intermediaries between borrowers and investors. In addition, except for the service fees that we charge the investors, we do not directly receive any funds from investors in our own accounts and funds from investors are deposited into and settled by a third-party custodian account managed by China Huaxia Bank. To date, we have not been subject to any fines or other penalties under any PRC laws and regulations that prohibit illegal fundraising. Nevertheless, considerable uncertainties exist with respect to the PBOC, the SAIC and other governmental authorities’ interpretations of the fundraising-related laws and regulations. Therefore, we cannot guarantee you that our current services provided to investors will not be deemed to violate illegal fundraising laws and regulations in the future.

 

Our ability to protect the confidential information of our users and funding sources and our ability to conduct our business may be adversely affected by cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions and we may be subject to liabilities imposed by the relevant government regulations.

 

Our platform collects, stores and processes certain personal and other sensitive data from our borrowers and funding sources. 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. The regulatory framework for privacy protection in China, Hong Kong and worldwide is currently evolving and is likely to remain uncertain for the foreseeable future. We could be adversely affected if legislation or regulations in China, Hong Kong and elsewhere on the world where we have business operations are expanded to require changes in business practices or privacy policies, or if the relevant governmental authorities in China, Hong Kong and elsewhere on the world where we have business operations interpret or implement their legislation or regulations in ways that negatively affect our business, financial condition and results of operations. For example, in November 2016, the Standing Committee of the National People’s Congress released the Cyber Security Law, which took effect in June 2017. The Cyber Security Law requires network operators to perform certain functions related to internet security protection and the strengthening of network information management. For instance, under the Cyber Security Law, network operators of key information infrastructure, including network operators of key information infrastructures in finance industry, generally shall, during their operations in the PRC, store the personal information and important data collected and produced within the territory of the PRC and their purchase of network products and services that may affect national securities shall be subject to national cybersecurity review. Furthermore, the PRC governmental authorities issued a series of administrative rules and regulations to enhance the security of information collected and used by mobile apps. For instance, such rules and regulations provide, among others, that (i) app operators should collect and use personal information in compliance with the Cyber Security Law and should not collect and use personal information in violation of laws, regulations or breach of user agreements, (ii) app operators should be responsible for the security of personal information obtained from users and take effective measures to strengthen the personal information protection, and (iii) app operators should not force their users to make authorization by means of bundling, suspending installation or in other default forms. See “Item 4. Information on the Company—B. Business Overview—Regulations— Regulations Related to Information Security, Censorship and Privacy — Regulations related to privacy protection.” We are constantly in the process of evaluating the potential impacts of the Cyber Security Law and other relevant laws and regulations on our current business practices. We plan to further strengthen our cyber-security measures with respect to information management and privacy protection of the user data stored in our system. We have not been subject to any material breaches of any of our cyber-security measures. However, we cannot assure you that the measures we have taken or will take are adequate under the Cyber Security Law and other relevant laws and regulations. If further changes in our business practices are required under China’s evolving regulatory framework for privacy protection, our business, financial condition and results of operations may be adversely affected. Furthermore, we use certain data collected from external data sources to verify the borrowers’ information in compliance with industry practice. In the event that the data collection and provision by any of our external data sources is considered in violation of the Cyber Security Law or other relevant laws and regulations, we may not be able to use relevant data for our credit assessment and our business may be materially and adversely affected.

 

33


Table of Contents

 

In addition to laws, regulations and other applicable rules regarding privacy and privacy advocacy, industry associations or other private parties may propose new and different privacy standards. Because the interpretation and application of privacy and 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 to us, damage our reputation, inhibit the use of our platform and harm our business.

 

The massive data that we have processed and stored makes us or the third-party service providers who host our servers a target and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic break-ins, or similar disruptions. While we have taken steps to protect the confidential information that we have access to, our security measures could be breached. Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access to our platform could cause, among other things, confidential user information to be stolen and used for criminal purposes, and could even result in misappropriation of funds of our borrowers and investors. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information and losses suffered by our borrowers and investors from the misappropriation of funds, time-consuming and expensive litigation and negative publicity. If security measures are breached because of any third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships with borrowers and investors could be severely damaged, we could incur significant liability and our business and operations could be adversely affected.

 

In addition, we rely on the massive amount of data and user information that we have accumulated over time to conduct our business. In particular we use user information to make credit assessment of borrowers. If these data are lost due to cyber-attacks, computer viruses, physical or electronic break-ins, or similar disruptions, our business could be adversely affected.

 

34


Table of Contents

 

Any significant disruption in our information technology systems, including events beyond our control, could prevent us from offering our products and services, thereby reduce the attractiveness of our products and services and result in a loss of borrowers and investors using our platform.

 

In the event of a system outage and physical data loss, our ability to provide credit products would be materially and adversely affected. The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, user service, reputation and our ability to attract new and retain existing borrowers and investors. Our information technology systems infrastructure is currently deployed and our data is currently mainly maintained through third-party cloud computing services in China. Our operations depend on the service provider’s ability to protect its and our systems in its 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. Although historically we have not experienced any system outage resulting in material interruption to our service provision, we cannot assure you that such incidents will not occur in the future. Moreover, if our arrangement with the service provider is terminated or if there is a lapse of service or damage to their facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new credit for borrowers.

 

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 and our reputation. We also may not have sufficient capacity to recover all data and services in the event of an outage. These factors could prevent us from processing credit applications and other business operations, damage our brands and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause borrowers and investors to abandon our products and services, any of which could adversely affect our business, financial condition and results of operations.

 

The offering of our products and services depend on the effective use of mobile operating systems and the efficient distribution through mobile app stores, which we do not control.

 

Our loan products and online wealth management products are mainly offered through mobile apps. It is difficult to predict the problems we may encounter in developing applications for newly released devices and platforms, and we may need to devote significant resources to the development, support and maintenance of such applications. We are dependent on the interoperability of providing our products and services on popular mobile operating systems that we do not control, such as Android and iOS, and any changes in such systems that degrade the accessibility of our products and services or give preferential treatment to competing products and services could adversely affect the usability of our products and services on mobile devices. In addition, we rely upon third-party mobile app stores for users to download our mobile apps. As such, the promotion, distribution and operation of our mobile apps are subject to app stores’ standard terms and policies for app developers.

 

Our future growth and results of operations could suffer if we experience difficulties in the future in offering our products and services through our apps in mobile devices or if problems arise with respect to our relationships with providers of mobile operating systems or mobile app stores, or if we have to incur increased costs to distribute or to have users access our apps on mobile devices. In the event that it is more difficult for our users to access and utilize our products and services on their mobile devices, or if our users choose not to access or use our products and services on their mobile devices or to use mobile operating systems that do not offer access to our products and services, our user growth could be harmed and our business and financial condition and operating results may be adversely affected.

 

Our operations depend on the performance of the internet infrastructure and telecommunications networks in China.

 

Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or the MIIT. Our systems infrastructure is currently deployed and our data is currently mainly maintained on third-party cloud computing services platform. Our cloud computing service provider may rely on a limited number of telecommunication service providers to provide it with data communications capacity through local telecommunications lines and internet data centers to host its servers. Such service provider may have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with increasing traffic. We cannot assure you that our cloud computing service provider and the underlying internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage.

 

35


Table of Contents

 

In addition, we have no control over the costs of the services provided by telecommunication service providers which in turn, may affect our costs of utilizing customized cloud computing services. If the prices we pay the third-party cloud computing services rise significantly, our results of operations may be adversely affected. Furthermore, if internet access fees or other charges to internet users increase, our user traffic may decline and our business may be harmed.

 

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

 

Our platform and internal systems rely on software that is highly technical and complex. In addition, our platform 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 released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for borrowers and investors using our platform, 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, results of operations and financial condition.

 

Our products and services contain open source software, which may pose particular risks to our proprietary software, products and services in a manner that negatively affect our business.

 

We use open source software in our products and services and will use open source software in the future. There is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide or distribute our products or services. Additionally, we may face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we developed using such software. These claims could result in litigation and could require us to make our software source code freely available, purchase a costly license or cease offering the implicated products or services unless and until we can re-engineer them to avoid infringement. This re-engineering process could require significant additional research and development resources, and we may not be able to complete it successfully.

 

Furthermore, because any software source code we contribute to open source projects is publicly available, our ability to protect our intellectual property rights with respect to such software source code may be limited or lost entirely. As a result, we may be unable to prevent our competitors or others from using such software source code contributed by us.

 

We may not be able to prevent unauthorized use of our intellectual property and may be subject to intellectual property infringement claims, which could reduce demand for our services, adversely affect our revenues and harm our competitive position.

 

We rely primarily on a combination of copyright, trademark and trade secret laws and contractual rights to establish and protect our intellectual property rights in our services, credit risk management procedures and policies and other aspects of our business. The steps we have taken or will take in the future to protect our intellectual property from infringement, misappropriation or piracy may be insufficient. Implementation of intellectual property-related laws in China has historically been lacking, primarily due to ambiguity in the PRC laws and enforcement difficulties. Accordingly, intellectual property rights and confidentiality protection in China may not be as effective as in the United States or other countries. As of the date of this annual report, we have registered a series of trademarks material to our business under our name in the PRC, including “ GRAPHIC “and “ GRAPHIC.” In addition, we are in the process of applying for trademark registrations in Indonesia, Thailand, Vietnam and Philippines. Current or potential competitors may use our intellectual property without our authorization in the development and marketing of services that are substantially equivalent or superior to ours, which could reduce demand for our services, adversely affect our revenues and harm our competitive position.

 

36


Table of Contents

 

Even if we were to discover evidence of infringement or misappropriation, our recourse against such competitors may be limited or could require us to pursue litigation, which could involve substantial costs and diversion of management’s attention from the operation of our business.

 

We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.

 

We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. We may be from time to time in the future subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.

 

Additionally, the 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 violated 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 held liable for information or content displayed on, retrieved from or linked to our websites and mobile applications, which may materially and adversely affect our business and operating results.

 

The PRC government has adopted regulations governing the distribution of content over the internet. Under these regulations, internet content providers are prohibited from posting or displaying over the internet any content that, among other things, violates PRC laws and regulations, impairs the national dignity of China or the public interest, or is obscene, superstitious, frightening, gruesome, offensive, fraudulent or defamatory. In addition to our website, we also offer our products and services through our mobile applications, which are regulated by the Administrative Provisions on Mobile Internet Applications Information Services, or the APP Provisions, promulgated by the Cyberspace Administration of China, or the CAC, on June 28, 2016 and effective on August 1, 2016. According to the APP Provisions, the providers of mobile applications shall not create, copy, publish or distribute information and content that is prohibited by laws and regulations. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations Related to Value-added Telecommunication Services—Regulations related to mobile internet applications information services.” At the end of 2019, the CAC issued the Provisions on the Management of Network Information Content Ecology, or the CAC Order No.5, which became effective on March 1, 2020, to further strengthen the regulation and management of network information content. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations Related to Information Security, Censorship and Privacy—Regulations related to internet security. “We have implemented internal control procedures screening the information and content on our websites and mobile applications to ensure their compliance with the APP Provisions and CAC Order No. 5. However, we cannot assure that all the information or content displayed on, retrieved from or linked to our websites and mobile applications complies with the requirements of the PRC laws and regulations at all times. If our websites or mobile applications were found to be violating the PRC laws and regulations, we may be subject to administrative penalties, including warning, service suspension or removal of our mobile applications from the relevant mobile application store, which may materially and adversely affect our business and operating results.

 

From time to time we may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt our business and adversely affect our financial results.

 

37


Table of Contents

 

We may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our platform and better serve our users. 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 such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.

 

Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including:

 

·                  difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, rights, platform, products and services of the acquired business;

 

·                  inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;

 

·                  difficulties in retaining, training, motivating and integrating key personnel;

 

·                  diversion of management’s time and resources from our daily operations;

 

·                  difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;

 

·                  difficulties in retaining relationships with customers, employees and suppliers of the acquired business;

 

·                  risks of entering markets in which we have limited or no prior experience;

 

·                  regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business both domestically and overseas;

 

·                  assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;

 

·                  failure to successfully further develop the acquired technology;

 

·                  liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;

 

·                  lack of sufficient influential power over the business we invest;

 

·                  potential disruptions to our ongoing businesses; and

 

·                  unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.

 

We may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits. For example, in 2016, we acquired a majority of equity interest in 9F Primasia Securities Limited, or 9F Primasia Securities, a company incorporated in Hong Kong, to offer stock investment products. In 2019, we made prepayments to acquire equity interest of Hubei Consumer Finance Company, and completed the acquisition of 24.47% equity interest in Hubei Consumer Finance Company in 2020. There is no assurance that these new investments or acquisitions will prove to be successful and we are subject to government rules and regulations which are evolving and subject to uncertainty. In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will lead to the successful development of new or enhanced products and services or that any new or enhanced products and services, if developed, will achieve market acceptance or prove to be profitable.

 

38


Table of Contents

 

Our planned expansion into more overseas markets and our operations in the existing overseas markets could fail, reduce operating results and expose us to increased risks associated with different market dynamics and competition in the overseas markets.

 

We may face many new obstacles in our planned expansion into more overseas markets and our operations in the existing overseas markets. For example, we started to offer offshore stock investments and insurance brokerage services in Hong Kong in 2016.  We have established, and are actively expanding our businesses overseas especially in Southeast Asian countries, and have obtained a few key financial services licenses in Southeast Asia. These markets are untested for our products and services, and we face risks in expanding our businesses overseas or operating in the existing overseas markets, which include economic, regulatory, legal and political risks inherent in doing businesses overseas, operations and sales in other jurisdictions, including challenges caused by distance and linguistic and cultural differences, the potential for longer collection periods and for difficulty in collecting accounts receivable and enforcing contractual obligations, fluctuations in currency exchange rates, unanticipated changes in laws or regulatory requirements, including tariffs or other barriers to trade, and the potential for political, legal and economic instability. For example, the COVID-19 pandemic has caused significant disruptions to the economic development in Southeast Asian countries, which could negatively affect our business operation and future development in this region. See “—Our business, financial condition and results of operations have been and are likely to continue to be materially and adversely affected by the outbreak of COVID-19.” We may not be as successful as our competitors in generating revenues in overseas markets due to the lack of recognition of our products and services or other factors. Developing product recognition overseas is expensive and time-consuming and our international expansion efforts may be more costly and less profitable than we expect. If we are not successful in our existing or target overseas markets, our sales could decline, our margins could be negatively impacted and we could lose market share, any of which could materially harm our business, results of operations and profitability.

 

For example, we started to offer offshore stock investments and insurance brokerage services in Hong Kong in 2016. We are licensed or registered with the Securities and Futures Commission of Hong Kong, or the SFC, to carry out Type 1 (dealing in securities), Type 4 (advising on securities), Type 5 (advising on corporate finance) and Type 9 (asset management) regulated activities under the Securities and Futures Ordinance (Cap. 571) of Hong Kong, or the SFO. As at December 31, 2019, there were respectively 1,430, 1,602, 177 and 1,808  licensed corporations which were licensed or registered with the SFC to carry out Type 1 (dealing in securities), Type 4 (advising on securities), Type 5 (advising on futures contracts) and Type 9 (asset management) regulated activities under the SFO. There are already established players in these industries. These entities are in direct competition with us and include not only the multi-national financial institutions but also local firms. Our directors believe that competition in the industry rests on (i) the quality of services and advice provided to clients; (ii) the expertise and reputation of the licensed corporation; and (iii) business network and connections of the licensed corporation. There is no assurance that we will be able to uphold our competitive strengths. Any intensified competition may result in our loss of market share, and could materially harm our business, results of operations and profitability.

 

We are subject to potential exposure to allegation of professional liability with respect to our business operation in Hong Kong.

 

Our business operation in Hong Kong involves the provision of professional advice to clients on stock investment by professional staff. A client who suffers loss due to such client’s reliance on the advice given by our subsidiary, 9F Primasia Securities may have a legal cause of action against 9F Primasia Securities or us for damage, compensation and/or other relief.

 

Although we have adopted certain relevant internal control measures to minimize the risk of professional negligence and/or employee infidelity with respect to our operation in Hong Kong, there is no assurance that these risks can be completely eliminated with respect to our operation in Hong Kong. Furthermore, as we have not maintained any insurance for allegations relating to professional negligence or employee infidelity, we are exposed to potential liabilities resulting from these allegations.

 

39


Table of Contents

 

If there is any allegation of professional negligence and/or employee infidelity brought against us, we may be exposed to legal and/or other proceedings in Hong Kong which may result in substantial costs and diversion of resources and management’s attention. It may also have an adverse impact on our profitability, financial position and reputation.

 

We are subject to extensive regulatory requirements with respect to our business operation in Hong Kong, non-compliance with which, or changes in these regulatory requirements, may affect our business operations and financial results.

 

The Hong Kong financial market in which we operate is highly regulated. There are changes in rules and regulations from time to time in relation to the regulatory regime for the financial service industry, including, but not limited to, the SFO, the Companies Ordinance (prior to its repeal and replacement on March 3, 2014 by the Companies Ordinance and the Companies (WUMP) Ordinance), the FRR, the Rules Governing the Listing of Securities and The Hong Kong Codes on Takeovers and Mergers and Share Buy-backs issued by the SFC, all as amended, supplemented or otherwise modified from time to time. Any such changes in the relevant rules and regulations may result in an increase in our cost of compliance, or might restrict our business activities. If we fail to comply with these applicable rules and regulations from time to time, we may face fines or restrictions on our business activities or even suspension or revocation of some or all of our licenses for carrying on our business activities.

 

Furthermore, we are required to be licensed with the relevant regulatory authorities including without limitation, as licensed corporations under the SFO. In this respect, we have to ensure continuous compliance with all applicable laws, regulations and guidelines, and satisfy the SFC, the Hong Kong Stock Exchange and/or other regulatory authorities that we remain fit and proper to be licensed. If there is any change or tightening of the relevant laws, regulations and guidelines, it may materially and adversely affect our business operations.

 

We may be subject to regulatory inspection and investigations from time to time. With respect to SFC investigations, we may be subject to secrecy obligations under the SFO whereby we are not permitted to disclose certain information relating to the SFC investigations. In addition, unless we are specifically named as the party that is being investigated under the SFO investigation, we generally do not know whether we, any member of us, or any of our respective directors, our responsible officers, our licensed representatives or our staff is the subject of SFC investigations. If the results of the inspections or investigations reveal misconduct, the SFC may take disciplinary actions such as revocation or suspension of licenses, public or private reprimand or imposition of pecuniary penalties against us, our responsible officers or licensed representative and/or any of our staff. Any disciplinary actions taken against or penalties imposed on us, our directors, responsible officers, licensed representatives or relevant staff could have an adverse impact on our business operations and financial results.

 

We have granted share options, and may continue to grant share options and other types of awards under our equity incentive plans, which may result in increased share-based compensation expenses.

 

We have adopted the 2015 Share Incentive Plan and 2016 Share Incentive Plan, effective as of June 2015 and June 2016, respectively, and as amended from time to time. As of June 15, 2020, options to purchase a total of 43,518,909 Class A ordinary shares of our company were granted to our managements and employees and outstanding. We recorded RMB2,180.5 million, RMB508.2 million and RMB353.2 million (US$50.7 million) in 2017, 2018 and 2019, respectively, in share-based compensation expenses. We believe the grant of share options and other types of awards is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share options and other types of awards to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

 

We may not be able to obtain additional capital on favorable terms or at all.

 

We anticipate that our current cash, cash provided by operating activities and funds available through our bank loans and credit facilities, will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months. However, we need to make continued investments in facilities, hardware, software, technological systems and to retain talents to remain competitive. Due to the unpredictable nature of the capital markets and the industries we are operating in, 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.

 

40


Table of Contents

 

We have incurred net losses and negative cash flow from operating activities, and may incur net losses and experience negative cash flow from operating activities in the future.

 

We incurred net losses of RMB2,153.6 million (US$309.4 million) in 2019, compared to a net income of RMB723.8 million and RMB1,975.2 million in 2017 and 2018, respectively. The net cash used in operating activities was RMB429.0 million (US$61.6 million) in 2019, and the net cash provided by operating activities were RMB2,865.6 and RMB2,345.9 million in 2017 and 2018, respectively.

 

Our future financial performance depends on, among other factors, our ability to continue to attract and retain borrowers and investors using our platform, our ability to further diversify our funding sources, in particular to maintain and attract financial institution partners, our service fee rates, our user acquisition cost, the effectiveness of our credit risk management system, the accuracy of the borrower credit profile we compile, comparative interest and fee rates, loan policies of major PRC banks, the regulatory environment in China, market competition, and our ability to provide innovative financial services to better serve our investors. Accordingly, you should not rely on the revenues of any past interim period or annual period as an indication of our future performance. We may not be able to maintain the current fee rates due to more intense competition in the future. We also expect our costs to increase in future periods as we continue to acquire new users and expand our business and operations. In addition, we expect to incur substantial costs and expenses as a result of being a public company. If we are unable to generate adequate revenues and to manage our expenses, we may not be able to recover from net losses in the future.

 

In addition, we may not be able to achieve profitability or generate positive cash flow from operating activities and, even if we achieve positive operating cash flow, it may not be sufficient to satisfy our anticipated capital expenditures and other cash needs. Further, we may not be able to fund our operating expenses and expenditures and may be unable to fulfill our financial obligations as they become due, which may result in voluntary or involuntary dissolution or liquidation proceedings and a total loss of your investment.

 

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

 

Our quarterly results of operations, including the levels of our net revenues, expenses, net (loss)/income and other key metrics, may vary significantly in the future due to a variety of factors, some of which are outside of our control, 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. Fluctuations in quarterly results may adversely affect the market price of our ADSs. Factors that may cause fluctuations in our quarterly financial results include but not limited to the following:

 

·                  our ability to attract new users, institutional funding partners and our other partners and maintain relationship with existing ones;

 

·                  our ability to further diversify our funding sources;

 

·                  loan origination volumes and the channels through which borrowers and investors are acquired, including the relative mix of online and offline channels;

 

·                  changes in our product mix and introduction of new loan products;

 

·                  the amount and timing of operating expenses related to acquiring users and the maintenance and expansion of our business, operations and infrastructure;

 

41


Table of Contents

 

·                  our decision to manage the growth of loan origination volume during the period;

 

·                  network outages or security breaches;

 

·                  general economic, regulatory, industry and market conditions;

 

·                  our emphasis on user experience instead of near-term growth; and

 

·                  the timing of expenses related to the development or acquisition of technologies or businesses.

 

In addition, we may experience seasonality in our business, reflecting seasonal fluctuations in internet usage and traditional personal consumption patterns, as our borrowers may use their borrowing proceeds to finance their personal consumption needs. While our rapid growth has somewhat masked this seasonality, our results of operations could be affected by such seasonality in the future.

 

Our business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling to continue in their present positions, our business may be severely disrupted.

 

Our business operations depend on the continued services of our senior management, particularly the executive officers named in this annual report. While we have provided different incentives to our management, we cannot assure you that we can continue to retain their services. 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 and we may incur additional expenses to recruit, train and retain qualified personnel, 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.

 

Furthermore, we started to offer offshore stock investments and insurance brokerage services in Hong Kong in 2016. Under the licensing requirements of the SFO, our licensed corporation, 9F Primasia Securities, is required to maintain at least two responsible officers to supervise one or more regulated activities as required under the SFO for each type of regulated activities. As of March 31, 2020, we have four responsible officers for Type 1 (dealing in securities), two responsible officers for Type 4 (advising on securities), Type 5 (advising on futures contracts) and Type 9 (asset management) regulated activities under the SFO, and are in compliance with the relevant laws and regulations in Hong Kong. In the event that such responsible officers resign, become disqualified or otherwise ineligible to continue their role as responsible officer, and if there is no immediate and adequate replacement, this may result in a situation where one or more of the four regulated activities have fewer than two responsible officers. In this case, we will be in breach of the relevant licensing requirements which could adversely affect our licensed corporations’ status, and our business and financial performance will be negatively impacted.

 

In addition, there is no assurance that any member of our management team will not join our competitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.

 

Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business.

 

We believe our success depends on the efforts and talent of our employees, including risk management, software engineering, financial and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled technical, risk management 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. Some 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 expenses 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 new employees, and the quality of our services and our ability to serve borrowers and investors could diminish, resulting in a material adverse effect to our business.

 

42


Table of Contents

 

Increases in labor costs in the PRC, Hong Kong and elsewhere on the world where we have operations may adversely affect our business and results of operations.

 

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. The requirement of employee benefit plans has not been implemented consistently by the local governments in the PRC given the different levels of economic development in different locations. We have not made adequate employee benefit payments for some of our employees, and we may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected. 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 users by increasing the fees of our services, our financial condition and results of operations may be adversely affected.

 

In addition, increases in labor costs in Hong Kong and elsewhere on the world where we have operations may also have a negative impact on our business and results of operations. For example, our licensed staff is essential to the Hong Kong business operation as we rely on their expertise to provide the relevant services. If competition for these licensed professional intensifies, the costs to retain and recruit them may increase. Furthermore, our business expansion in Hong Kong, Southeast Asia and elsewhere in the world is also expected to increase our labor costs in the future, which may adversely affect our business and results of operations.

 

If we cannot maintain our corporate culture as we grow, our capabilities of innovation, collaboration and focus that contribute to our business may be compromised.

 

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 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.

 

We may not have enough business insurance coverage.

 

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of 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.

 

Our use of some leased properties could be challenged by third parties or government authorities, which may cause interruptions to our business operations.

 

As of the date of this annual report, we leased properties for most of our offices and branch offices. The lessors of some leased properties have not been able to provide proper ownership certificates for the properties we lease or prove their rights to sublease the properties to us. If our lessors are not the owners of the properties and they have not obtained consents from the owners or their lessors or permits from the relevant government authorities, our leases could be invalidated. We may have to renegotiate the leases with the owners or the parties who have the right to lease the properties, and the terms of the new leases may be less favorable to us. In addition, our leasehold interests in leased properties have not been registered with relevant PRC government authorities as required by PRC law, which may expose us to potential fines of up to RMB10,000 per unit leasehold.

 

43


Table of Contents

 

As of the date of this annual report, we are not aware of any claims or actions being contemplated or initiated by government authorities, property owners or any other third parties with respect to our leasehold interests in or use of such properties. However, we cannot assure you that our use of such leased properties will not be challenged. In the event that our use of properties is successfully challenged, we may be subject to fines and forced to relocate the affected operations. In addition, we may become involved in disputes with the property owners or third parties who otherwise have rights to or interests in our leased properties. We can provide no assurance that we will be able to find suitable replacement sites on terms acceptable to us on a timely basis, or at all, or that we will not be subject to material liability resulting from third parties’ challenges on our use of such properties. As a result, our business, financial condition and results of operations may be materially and adversely affected.

 

If our preferential tax treatments are revoked, become unavailable or if the calculation of our tax liability is successfully challenged by the PRC tax authorities, we may be required to pay tax, interest and penalties in excess of our tax provisions, and our results of operations could be materially and adversely affected.

 

The PRC government has provided various tax incentives to our subsidiaries, variable interest entities and their respective subsidiaries. These incentives include reduced enterprise income tax rates and exemption from enterprise income tax. For example, under the relevant PRC tax laws, the statutory enterprise income tax rate is 25%. However, the income tax rate of an enterprise that has been determined to be a “high and new technology enterprise” can be reduced to a favorable rate of 15%. In addition, the income tax rate of enterprises of encouraged industries in certain regions or enterprises qualified as “small enterprises with low profits” can be reduced to a favorable rate of 20%. Several of our subsidiaries, variable interest entities and their respective subsidiaries are either subject to the favorable income tax rate of 15%, 20% or been exempted from the enterprise income tax for a certain period. For details, please refer to “Item 5. Operating and Financial Review and Prospects—Taxation—China.”  Any increase in the enterprise income tax rate applicable to our subsidiaries, variable interest entities and their respective subsidiaries, or any discontinuation or retroactive or future reduction of any of the favorable tax treatments currently enjoyed by our subsidiaries, variable interest entities and their respective subsidiaries, could materially and adversely affect our business, financial condition and results of operations. In addition, in the ordinary course of our business, we are subject to complex income tax and other tax regulations and significant judgment is required in the determination of a provision for income taxes. Furthermore, competent PRC tax authorities may conduct tax audits on our subsidiaries, variable interest entities and their respective subsidiaries, and may also challenge our calculation of tax liability. Although we believe our tax provisions are reasonable, if the PRC tax authorities successfully challenge our position and we are required to pay tax, interest and penalties in excess of our tax provisions, our financial condition and results of operations would be materially and adversely affected.

 

In connection with the audit of our consolidated financial statements included in this annual report, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. If we fail to develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.

 

Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the audit of our consolidated financial statements as of December 31, 2018 and 2019 and for the years ended December 31, 2017, 2018 and 2019, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, or PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

 

One material weakness that has been identified related to the lack of sufficient financial reporting and accounting personnel with appropriate U.S. GAAP knowledge and SEC reporting requirements to properly address complex U.S. GAAP technical accounting issues and to prepare and review financial statements and related disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the SEC. The other material weakness that has been identified related to our lack of comprehensive accounting policies and procedures manual in accordance with U.S. GAAP. Either of these material weaknesses, if not timely remedied, may lead to significant misstatements in our consolidated financial statements in the future. For example, such material weaknesses have resulted in errors in recognition of revenue and sales and marketing expenses in the consolidated financial statements as of and for the years ended December 31, 2016 and 2017, which has been rectified by our restatements on revenues, selling expenses, and cumulative effects of these adjustments on the previously issued consolidated financial statements as of and for the years ended December 31, 2016 and 2017, as discussed in “ Item 15. Controls and Procedures—Internal Control Over Financial Reporting.” Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act for purpose of identifying and reporting any material weakness in our internal control over financial reporting. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional deficiencies may have been identified.

 

44


Table of Contents

 

Following the identification of the material weaknesses, we have taken measures and plan to continue to take measures to remedy these material weaknesses. See “Item 15. Controls and Procedures—Internal Control over Financial Reporting.” However, we cannot assure you that the implementation of these measures will be sufficient to eliminate such material weaknesses, or that material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future. Our failure to correct these material weaknesses or our failure to discover and address any other material weaknesses or significant deficiencies could result in inaccuracies in our financial statements and impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, ineffective internal control over financial reporting could significantly hinder our ability to prevent fraud.

 

Furthermore, it is possible that, had our independent registered public accounting firm conducted an audit of our internal control over financial reporting, such firm may have identified additional material weaknesses and significant deficiencies. We are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, requires that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2020. 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, after we become a public company, 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.

 

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other material weaknesses and significant deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our consolidated financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of the ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our consolidated financial statements for prior periods.

 

Risks Related to Our Corporate Structure

 

If the PRC government deems that the contractual arrangements in relation to our consolidated affiliated entities do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

 

Foreign ownership of value-added telecommunication businesses, such as online data processing and transaction processing services and internet information services, is subject to restrictions under current PRC laws and regulations. For example, foreign investors are generally not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider except for those engaged in e-commerce business, domestic multi-party communications services business, store-and-forward business and call center business, which may be 100% owned by foreign investors, and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Special Administrative Measures for Entry of Foreign Investment (Negative List) (2019 Version), or the Negative List, which became effective on July 30, 2019 and replaced the negative list in the Guidance Catalog of Industries for Foreign Investment (2018 Revision), and other applicable laws and regulations.

 

45


Table of Contents

 

We are a Cayman Islands exempted company and our PRC subsidiaries are considered foreign invested enterprises. Our wholly foreign-owned PRC subsidiaries are currently not eligible to apply for the required licenses for providing value-added telecommunication services that foreign ownership and investment is restricted in China. The Interim Measures which was published in August 2016 clarified that online lending information intermediary services fell within the category of value-added telecommunication services and the online lending information intermediaries should be subject to value-added telecommunication regulations. Therefore, the online consumer finance services offered by us in China constitute a type of value-added telecommunication services that foreign ownership and investment is restricted and therefore we should provide these services through a variable interest entity to ensure compliance with the relevant PRC laws and regulations. We set up a series of contractual arrangements entered into among our certain PRC Subsidiaries, each of Jiufu Shuke, Beijing Puhui, Zhuhai Lianyin, Jiufu Meihao and Wu Kong Mao (collectively, the “consolidated affiliated entities” or “VIEs”), and the shareholders of each consolidated affiliated entity to conduct our principal operations in China. For a detailed description of these contractual arrangements, see “Corporate History and Structure.” As a result of these contractual arrangements, we exert control over our consolidated affiliated entities and their subsidiaries and consolidate their operating results in our financial statements under U.S. GAAP.

 

In the opinion of our PRC counsel, Han Kun Law Offices, our current ownership structure, the ownership structure of our consolidated affiliated entities and their subsidiaries, and the contractual arrangements among certain of our PRC Subsidiaries, our consolidated affiliated entities and the shareholders of our consolidated affiliated entities are not in violation of any explicit provisions of the existing PRC laws, regulations and rules; and these contractual arrangements are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect. However, Han Kun Law Offices has also advised us that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately take a view that is consistent with the opinion of our PRC counsel.

 

It is uncertain whether any new PRC laws, regulations or rules relating to the “variable interest entity” structure will be adopted and if adopted, what they would provide. In particular, on January 1, 2020, the PRC Foreign Investment Law and the Regulations for Implementation of the Foreign Investment Law of the People’s Republic of China, or the Implementation Regulations, came into effect. Although the PRC Foreign Investment Law and the Implementation Regulations do not explicitly classify contractual arrangements as a form of foreign investment, the definition of the “foreign investment” under the PRC Foreign Investment Law contains a catch-all provision providing that investments made by foreign investors through other methods specified in laws or administrative regulations or other methods prescribed by the State Council, which leaves leeway for future laws, administrative regulations or provisions promulgated by the Stale Council to provide for contractual arrangements as a method of foreign investment. On December 26, 2019, the Supreme People’s Court issued the Interpretations on Certain Issues Regarding the Applicable of Foreign Investment Law, or the FIL Interpretations, which came into effect on January 1, 2020. In accordance with the FIL Interpretations, where a party concerned claims an investment agreement to be invalid on the basis that it is for investment in prohibited or restricted industries under the negative list and violates the restrictions set out therein, the courts should support such claim. Therefore, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities in the future. If the ownership structure, contractual arrangements and business of our company, our PRC subsidiaries or our consolidated affiliated entities are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain or maintain any of the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of our consolidated affiliated entities and their subsidiaries, revoking the business licenses or operating licenses of our consolidated affiliated entities and their subsidiaries, shutting down our servers or blocking our online digital financial account system, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from our offerings to finance our business and operations in China, and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If any of these occurrences results in our inability to direct the activities of our consolidated affiliated entities and their subsidiaries, and/or our failure to receive economic benefits from our consolidated affiliated entities and their subsidiaries, we may not be able to consolidate their results into our consolidated financial statements in accordance with U.S. GAAP.

 

46


Table of Contents

 

We rely on contractual arrangements with our consolidated affiliated entities and shareholders of our consolidated affiliated entities for a significant portion of our business operations, which may not be as effective as direct ownership in providing operational control.

 

We have relied and expect to continue to rely on contractual arrangements with our consolidated affiliated entities and shareholders of our consolidated affiliated entities, to operate our online consumer finance business, including, among others, the operation of our digital financial account platform, as well as certain other complementary businesses. These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated affiliated entities and their subsidiaries. For example, our consolidated affiliated entities and shareholders of our consolidated affiliated entities may fail to fulfill their contractual obligations with us, such as failure to operate our digital financial account platform effectively and use the domain names and trademarks in a manner as stipulated in the contractual arrangements, or taking other actions that are detrimental to our interests.

 

If we had direct ownership of our consolidated affiliated entities, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our consolidated affiliated entities, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our consolidated affiliated entities and shareholders of our consolidated affiliated entities of their obligations under the contractual arrangements to exercise control over our consolidated affiliated entities and their subsidiaries. The shareholders of our consolidated affiliated entities may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we operate our business through the contractual arrangements with our consolidated affiliated entities and shareholders of our consolidated affiliated entities. Although we have the right to replace any shareholder of our consolidated affiliated entities under the contractual arrangements, if any of these shareholders is uncooperative or any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings, the outcome of which will be subject to uncertainties. See “—Any failure by our consolidated affiliated entities or shareholders of our consolidated affiliated entities to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.” Therefore, our contractual arrangements with our consolidated affiliated entities and shareholders of our consolidated affiliated entities may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

 

Any failure by our consolidated affiliated entities or shareholders of our consolidated affiliated entities to perform their obligations under our contractual arrangements would have a material adverse effect on our business.

 

If our consolidated affiliated entities or the shareholders of our consolidated affiliated entities fail to perform their respective obligations under the contractual arrangements, we may incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of our consolidated affiliated entities were to refuse to transfer their equity interests in our consolidated affiliated entities to us or our designee when we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

 

All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. These arbitration provisions relate to claims arising from the contractual relationship created by the VIE agreements, rather than claims under US federal securities laws, and they do not prevent our shareholders or ADS holders from pursuing claims under US federal securities laws in the United States. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest entity should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated affiliated entities and their subsidiaries, and our ability to conduct our business may be negatively affected. See “—Risks Related to Doing Business in China and Hong Kong—Uncertainties in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to us.”

 

47


Table of Contents

 

The shareholders of our consolidated affiliated entities may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

 

The equity interests of our consolidated affiliated entities are held by certain individual shareholders. See “Item 4. Information on the Company—C. Organizational Structure.” Their interests in our consolidated affiliated entities may differ from the interests of our company as a whole. These shareholders may breach, or cause our consolidated affiliated entities to breach, the existing contractual arrangements we have with them and our consolidated affiliated entities, which would have a material adverse effect on our ability to effectively control our consolidated affiliated entities and their subsidiaries and receive economic benefits from them. For example, the shareholders of our consolidated affiliated entities may be able to cause our agreements with our consolidated affiliated entities to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.

 

Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the exclusive option agreement with these shareholders to request them to transfer all of their equity interests in our consolidated affiliated entities to us or our designee, to the extent permitted by PRC laws. If we cannot resolve any conflict of interest or dispute between us and the shareholders of our consolidated affiliated entities, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

Contractual arrangements in relation to our consolidated affiliated entities may be subject to scrutiny by the PRC tax authorities and they may determine that we or our consolidated affiliated entities owe additional taxes, which could negatively affect our financial condition and the value of your investment.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. The PRC Enterprise Income Tax Law and other applicable laws and regulations require every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among certain of our PRC Subsidiaries, each of our consolidated affiliated entities, and the shareholders of such consolidated affiliated entity were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, regulations and rules, and adjust our consolidated affiliated entities in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our consolidated affiliated entities for PRC tax purposes, which could in turn increase their tax liabilities without reducing tax expenses of our PRC Subsidiaries. In addition, if we request the shareholders of our consolidated affiliated entities to transfer their equity interests in our consolidated affiliated entities at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject our designees to PRC income tax; and the taxable incomes of a transferring shareholder may be adjusted by the PRC tax authorities to an amount higher than the transfer price set forth under these contractual arrangements and thus the transferring shareholder may be subject to PRC income tax. The tax incurred during the equity interest transfer may be undertaken by us. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on our consolidated affiliated entities for the adjusted but unpaid taxes according to the applicable laws and regulations. Our financial position could be materially and adversely affected if our consolidated affiliated entities’ tax liabilities increase or if they are required to pay late payment fees and other penalties.

 

48


Table of Contents

 

We may lose the ability to use and enjoy assets and licenses held by our consolidated affiliated entities that are material to the operation of our business if such entities go bankrupt or become subject to a dissolution or liquidation proceeding.

 

Our consolidated affiliated entities hold certain assets and licenses that are material to the operation of our business, including, among others, intellectual properties and value-added telecommunication licenses. Under the contractual arrangements, our consolidated affiliated entities may not, and the shareholders of our consolidated affiliated entities may not cause them to, in any manner, sell, transfer, mortgage or dispose of their assets or their legal or beneficial interests in the business without our prior consent. However, in the event our consolidated affiliated entities’ shareholders breach the these contractual arrangements and voluntarily liquidate our consolidated affiliated entities, or our consolidated affiliated entities declare bankruptcy and all or part of their assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If our consolidated affiliated entities undergo a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

 

If the chops of our PRC subsidiaries, our consolidated affiliated entities and their subsidiaries, are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised.

 

In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes. The chops of our PRC subsidiaries, our consolidated affiliated entities and their subsidiaries are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safe, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so.

 

Risks Related to Doing Business in China and Hong Kong

 

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

 

Substantially all of our operations are located in China. Accordingly, our business, prospects, financial condition and results of operations may be influenced to a significant decree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

 

The Chinese economy differs from the economies of most developed countries in many respects, including 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 allocating resources, controlling payment of foreign currency-denominated obligations, setting the monetary policy and providing preferential treatment to particular industries or companies.

 

49


Table of Contents

 

While the Chinese economy has experienced significant growth over the past decades, 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, banking and shadow banking, or changes in tax regulations. The growth rate of the Chinese economy has gradually slowed since 2010, and the impact of COVID-19 on the Chinese economy in 2020 is likely to be severe. China’s GDP decreased by 6.8% year-over-year in the first quarter of 2020 amid the COVID-19 pandemic.  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.

 

A severe or prolonged downturn in the Chinese or global economy could materially and adversely affect our business and financial condition.

 

COVID-19 pandemic had a severe and negative impact on the Chinese and the global economy in the first quarter of 2020. China’s GDP decreased by 6.8% year-over-year in the first quarter of 2020 amid the COVID-19 pandemic. Whether this will lead to a prolonged downturn in the economy is still unknown. Even before the outbreak of COVID-19, the global macroeconomic environment was facing numerous challenges. The growth rate of the Chinese economy had already been slowing since 2010. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China, even before 2020. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial condition.

 

Volatility of the stock market in Hong Kong could materially and adversely affect our business and financial condition.

 

As we have stock business operations in Hong Kong, we are subject to the volatility of the stock market in Hong Kong. The Hong Kong stock market is directly affected by the local and international economic and socio-political environments. Any downturn in the stock market in Hong Kong will directly and adversely affect the number of active corporate finance projects in the market and therefore our performance. Historically, the local and international economic and socio-political environments fluctuated from time to time and the Hong Kong stock market was volatile due to the fluctuation. Severe fluctuation in market and economic sentiments may also result in prolonged period of sluggish market activities which would in turn have material adverse impact on our business and financial condition.

 

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

 

The PRC legal system is based on written statutes, and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.

 

50


Table of Contents

 

In particular, PRC laws and regulations concerning the online consumer finance 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 China Banking and Insurance Regulatory Commission, and other competent government authorities, 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 further promulgate new laws and regulations regulating the online consumer finance industry and other businesses we have already engaged in and may further expand in the future. We cannot assure you that our practice would not be deemed to violate any new PRC laws or regulations. Moreover, developments in the online consumer finance 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 online consumer finance companies like us, which could materially and adversely affect our business and operations.

 

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. 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) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our operations.

 

Uncertainties exist with respect to the interpretation and implementation of the new PRC Foreign Investment Law and its Implementation Regulation and how it may impact the viability of our current corporate structure, corporate governance and business operations.

 

On January 1, 2020, the Foreign Investment Law and the Implementation Regulations came into effect and replace the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The PRC Foreign Investment Law and the Implementation Regulation embody an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since they are relatively new, uncertainties still exist in relation to their interpretation and implementation. For instance, under the PRC Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Although it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities in the future. In addition, the definition contains a catch-all provision providing that investments made by foreign investors through other methods specified in laws or administrative regulations or other methods prescribed by the State Council, which leaves leeway for future laws, administrative regulations or provisions promulgated by the Stale Council to provide for contractual arrangements as a method of foreign investment. Furthermore, in accordance with the FIL Interpretations which came into effect on January 1, 2020, where a party concerned claims an investment agreement to be invalid on the basis that it is for investment in prohibited or restricted industries under the negative list and violates the restrictions set out therein, the courts should support such claim. Given the foregoing, it is uncertain whether our contractual arrangements will be deemed to be in violation of the market entry clearance requirements for foreign investment under the PRC laws and regulations.

 

The “variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions or prohibitions in China. See “—Risks Related to Our Corporate Structure” and “Corporate History and Structure.” There are uncertainties as to how the PRC Foreign Investment Law and its Implementation Regulations would be further interpreted and implemented. We cannot assure you that their interpretation and implementation made by the relevant governmental authorities in the future will not materially impact the viability of our current corporate structure, corporate governance and business operations in any aspect.

 

51


Table of Contents

 

Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing VIE structure, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. If we fail to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges, we would not be able to (i) continue our business in China through our contractual arrangements with our consolidated affiliated entities and shareholders of our consolidated affiliated entities, (ii) exert control over our consolidated affiliated entities and their subsidiaries, (iii) receive the economic benefits of our consolidated affiliated entities and their subsidiaries under such contractual arrangements, or (iv) consolidate the financial results of our consolidated affiliated entities and their subsidiaries. Were this to occur, our results of operations and financial condition would be materially and adversely affected and the market price of our ADSs may decline.

 

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, permits or filings 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.

 

We only have contractual control over our digital financial account system. We do not directly own the account system due to the restriction of foreign investment in businesses providing value-added telecommunication services in China, including internet information provision services. This may significantly disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects on us.

 

Our digital financial account platform, operated by our consolidated affiliated entities and their subsidiaries, provides value-added telecommunications services, which would require our consolidated affiliated entities and their subsidiaries to obtain certain value-added telecommunications business license. See “Regulation—Regulations Related to Our Business Operation in China—Regulations Related to Value-added Telecommunication Services.” Furthermore, it is uncertain if our consolidated affiliated entities and their subsidiaries will be required to obtain additional value-added telecommunications business license with respect to our mobile applications and our online platforms in addition to the value-added telecommunications business licenses that have been obtained by our consolidated affiliated entities and their subsidiaries.

 

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 and completed all the record-filing procedures 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, permits or filings or promulgates new laws and regulations that require additional approvals, licenses, permits or filings 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 rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.

 

We are a holding company, and we rely on dividends and other distributions on equity paid by our PRC subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require our PRC subsidiaries to adjust its taxable income under the contractual arrangements it currently has in place with our consolidated affiliated entities and their shareholders in a manner that would materially and adversely affect their ability to pay dividends and other distributions to us. See “—Risks Related to Our Corporate Structure—Contractual arrangements in relation to our consolidated affiliated entities may be subject to scrutiny by the PRC tax authorities and they may determine that we or our consolidated affiliated entities owe additional taxes, which could negatively affect our financial condition and the value of your investment.”

 

52


Table of Contents

 

Under PRC laws and regulations, our PRC subsidiaries, as wholly foreign-owned enterprises in China, may pay dividends only out of their respective accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to discretional funds. These reserve funds and discretional funds are not distributable as cash dividends.

 

Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange, or the SAFE, by complying with certain procedural requirements. Therefore, our PRC subsidiaries directly held by our non-PRC subsidiaries are able to pay dividends in foreign currencies to their non-PRC shareholders without prior approval from the SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our company who are PRC residents. However, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies.

 

In response to the persistent capital outflow and RMB’s depreciation against U.S. dollar in the fourth quarter of 2016, the PBOC and the SAFE have implemented a series of capital control measures, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. The PRC government may continue to strengthen its capital controls and our PRC subsidiaries’ dividends and other distributions may be subjected to tighter scrutiny in the future. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions 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. See also “—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”

 

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of our offerings to make loans to or make additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

 

Any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to approval by or registration or filing with relevant governmental authorities in China. According to the relevant PRC regulations on foreign-invested enterprises in China, capital contributions to our PRC subsidiaries are subject to registration with the State Administration for Market Regulation, or the SAMR or its local branches, the information reporting in the online enterprise registration system, and foreign exchange registration with qualified banks. In addition, (a) any foreign loan procured by our PRC subsidiaries, consolidated affiliated entities and their subsidiaries is required to be filed with SAFE through the online filing system of SAFE, and (b) each of our PRC subsidiaries, consolidated affiliated entities and their subsidiaries may not procure loans which exceed a statutory upper limit. Any loan to be provided by us to our PRC subsidiaries, consolidated affiliated entities and their subsidiaries with a term of more than one year must be recorded and registered by the NDRC or its local branches. We may not complete such approval, recording, filings or registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries, consolidated affiliated entities and their subsidiaries. If we fail to complete such approval, recording, filings or registrations, our ability to use the proceeds of our offerings and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

 

53


Table of Contents

 

On March 30, 2015, the SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19, which took effect as of June 1, 2015. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises and allows foreign-invested enterprises to settle their foreign exchange capital at their discretion, but continues to prohibit foreign-invested enterprises from using the Renminbi fund converted from their foreign exchange capitals for expenditures beyond their business scopes. On June 9, 2016, the SAFE promulgated the Circular on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange, or SAFE Circular 16. SAFE Circular 19 and SAFE Circular 16 continue to prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, securities investment or other financial investment except for guaranteed financial products issued by banks, providing loans to non-affiliated enterprises unless otherwise permitted under its business scope or constructing or purchasing real estate not for self-use. On October 23, 2019, the SAFE issued the Circular on Further Promoting Cross-border Trade and Investment Facilitation, or SAFE Circular 28, which expressly allows foreign-invested enterprises that do not have equity investments in their approved business scope to use their capital obtained from foreign exchange settlement to make domestic equity investments as long as the investments are real and in compliance with the foreign investment-related laws and regulations. See “Item 4. Information on the Company—B. Business Overview—Regulations—Regulations on Foreign Exchange—General administration of foreign exchange.” The applicable foreign exchange circulars and rules may significantly limit our ability to transfer to and use in China the net proceeds from our offerings, which may adversely affect our business, financial condition and results of operations.

 

Fluctuations in exchange rates could have a material adverse effect on our results of operations and the price of our ADSs.

 

The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. The value of Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. We cannot assure you that 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 Renminbi and the U.S. dollar in the future.

 

Any significant appreciation or depreciation of Renminbi may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, a significant depreciation of Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs.

 

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

 

Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.

 

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our net revenues in RMB. Under our current corporate structure, our company in the Cayman Islands relies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore, our PRC subsidiaries are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our company who are PRC residents. But approval from, registration or filing with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies.

 

54


Table of Contents

 

In light of the flood of capital outflows of China in 2016 due to the weakening RMB, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement. More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. The PRC government may at its discretion further restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

 

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. We have not made adequate employee benefit payments. Neither have we fully withheld the individual income tax in accordance with the relevant PRC laws and regulations.

 

With respect to the underpaid employee benefits, we may be required to make up the contributions for these plans as well as to pay late fees and fines; with respect to the underwithheld individual income tax, we may be required to make up sufficient withholding and pay late fees and fines. 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.

 

The 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 Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, and some other 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, including requirements that the approval from MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or natural persons acquire an affiliated PRC domestic enterprise. After the PRC Foreign Investment Law and its Implementation Regulations became effective on January 1, 2020, the provisions of the M&A Rules remain effective to the extent they are not inconsistent with the PRC Foreign Investment Law and its Implementation Regulations. Moreover, the Anti-Monopoly Law requires that the State Administration for Market Regulation, or the SAMR, shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the PRC government authorities that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the PRC government authorities, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. 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 the MOFCOM, the SAMR or other PRC government authorities may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

55


Table of Contents

 

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

 

The SAFE promulgated the Circular on Relevant Issues Relating to PRC Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014, which replaced the previous Circular on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments through Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE Circular 37 requires PRC residents, including PRC resident individuals and PRC 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 resident individuals must update their SAFE registrations when the offshore special purpose vehicle that such PRC resident individuals directly own the equity interests in undergoes material events relating to any change of basic information (including change of such PRC residents or entities, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. SAFE Circular 37 also requires a PRC entity to undergo the foreign exchange registration and updating procedure in accordance with the Provisions on Foreign Exchange Administration of the Outbound Direct Investment of Domestic Institutions, issued by the SAFE in July 2009 and other relevant regulations.

 

On February 28, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. In accordance with SAFE Notice 13, PRC residents are required to apply for foreign exchange registration of foreign direct investment and outbound direct investment, including those required under SAFE Circular 37, with qualified banks, instead of SAFE. The qualified banks, under the supervision of SAFE, directly examine the applications and conduct the registration.

 

In addition, pursuant to the Measures for the Administration of Outbound Investment promulgated by the MOFCOM in August 2014, and the Administrative Measures of Outbound Investment of Enterprises promulgated by NDRC in December 2017, both of which replaced previous rules regarding outbound direct investment by PRC entities, any outbound investment of PRC enterprises is required to be approved by or filed with MOFCOM, NDRC or their local branches. Certain state-owned enterprises may also be required to complete approval or filing procedures with state-owned assets supervision and administration authorities for some of their outbound direct investment.

 

If our direct or indirect shareholders who are PRC residents do not complete their registration with the local SAFE branches or qualified banks, 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.

 

Our founders and a number of our directors, officers and individual shareholders who indirectly hold shares in our Cayman Islands holding company and who are known to us as being PRC residents, including Yifan Ren, Lei Sun, Changxing Xiao, Dongcheng Zhang, Lei Liu, Lixing Chen, Jiachun Qu and Zhijun Li, have completed the foreign exchange registrations in accordance with SAFE Circular 37 or SAFE Circular 75 then in effect. In October 2018, Lei Sun established a trust, of which he and his family members are beneficiaries, and transferred all shares of our company he beneficially owned to this trust. Each of the four other directors and officers of our company established a trust, of which he and his family members are beneficiaries, and transferred all shares of our company he beneficially owned to such trust, respectively. See “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.” All beneficiaries of such trusts who are PRC residents are required to complete relevant registrations pursuant to SAFE Circular 37. We have notified the beneficiaries of the trusts who we know are PRC residents of their filing obligation, including the obligation to make initial registration or updates under SAFE Circular 37, and such beneficiaries have undertaken to complete relevant registrations as soon as such registration is practical with the local SAFE branches or qualified banks.

 

However, we may not be informed of the identities of all the PRC residents holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with the requirements of SAFE Circular 37 and other outbound investment related regulations. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE Circular 37 and other outbound investment related regulations. Failure by such shareholders or beneficial owners to comply with SAFE Circular 37 and other outbound investment related regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiaries, could subject us or our shareholders to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiaries’ ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.

 

56


Table of Contents

 

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

 

Pursuant to SAFE Circular 37, PRC residents who participate in stock incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose vehicles. In the meantime, our directors, executive officers and other employees who are PRC residents and who have been granted stock options by us, may follow the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, promulgated by the SAFE in 2012, or 2012 SAFE Notices. Pursuant to the 2012 SAFE Notices, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our directors, executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted stock options will be subject to these regulations. Failure to complete the SAFE registrations may subject them to fines and legal sanctions, and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “ Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Our Business Operation in China—Regulations Related to Employee Stock Incentive Plan.”

 

The State Administration of Taxation, or SAT, has issued certain circulars concerning employee stock options and restricted shares. Under these circulars, our employees working in China who exercise stock options or are granted restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee stock options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities. See “ Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Related to Our Business Operation in China—Regulations Related to Employee Stock Incentive Plan.”

 

If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.

 

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. Circular 82, issued by the SAT in April 2009 and amended in December 2017, 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. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

 

57


Table of Contents

 

We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Item. 10 Additional Information—Taxation—People’s Republic of China Taxation.” However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” As substantially all of our management members are based in China, it remains unclear how the tax residency rule will apply to our case. If the PRC tax authorities determine that 9F Inc. or any of our subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then 9F Inc. or such subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of our ADSs or Class A ordinary shares may be subject to PRC tax, and dividends we pay 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), if such gains or dividends are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or Class A ordinary shares.

 

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 incorporated 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, and the Notice on Certain Issues with Respect to the Enforcement of Dividend Provisions in Tax Treaties, or the Circular 81, issued by the SAT, such withholding tax rate may be lowered to 5% if the PRC enterprise is at least 25% held by a Hong Kong enterprise for at least 12 consecutive months prior to distribution of the dividends and is determined by the relevant PRC tax authority to have satisfied other conditions and requirements under the Double Tax Avoidance Arrangement and other applicable PRC laws. However, based on the Circular 81, if the relevant PRC tax authority determines, in its discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authority may adjust the preferential tax treatment. Furthermore, in October 2019, the SAT promulgated the Administrative Measures for Non-Resident Taxpayers to Enjoy Treaty Treatments, or Circular 35, which became effective on January 1, 2020 and superseded the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties. The Circular 35 abolished the record-filing procedure for justifying the tax treaty eligibility of taxpayers, and stipulates that non-resident taxpayers can enjoy tax treaty benefits via the “self-assessment of eligibility, claiming treaty benefits, retaining documents for inspection” mechanism. Non-resident taxpayers can claim tax treaty benefits after self-assessment provided that relevant supporting documents shall be collected and retained for post-filing inspection by the tax authorities. In addition, based on the Notice on Issues concerning Beneficial Owner in Tax Treaties, or Circular 9, issued on February 3, 2018 by the SAT, which became effective from April 1, 2018, when determining the applicant’s status of the “beneficial owner” regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors, including without limitation, whether the applicant is obligated to pay more than 50% of the applicant’s income in twelve months to residents in third country or region, whether the business operated by the applicant constitutes the actual business activities, and whether the counterparty country or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes or levy tax at an extremely low rate, will be taken into account, and it will be analyzed according to the actual circumstances of the specific cases. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. See “Item 10. Additional Information—Taxation—People’s Republic of China Taxation.” We cannot assure you that our determination regarding our qualification to enjoy the preferential tax treatment will not be challenged by the relevant PRC tax authority or we will be able to complete the necessary filings with the relevant PRC 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 9F HK, our Hong Kong subsidiary.

 

58


Table of Contents

 

We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

 

Pursuant to the Circular on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, issued by the SAT in 2009 with retroactive effect from January 1, 2008, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (a) has an effective tax rate less than 12.5% or (b) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the competent tax authority of the PRC resident enterprise this Indirect Transfer.

 

On February 3, 2015, the SAT issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 supersedes certain rules with respect to the Indirect Transfer under SAT Circular 698, but does not touch upon the other provisions of SAT Circular 698, which remain in force. SAT Public Notice 7 has introduced a new tax regime that is significantly different from the previous one under SAT Circular 698. SAT Public Notice 7 extends its tax jurisdiction to not only Indirect Transfers set forth under SAT Circular 698 but also transactions involving transfer of other taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferor shall be subject to withholding of applicable taxes, currently at a rate of 10%. On October 17, 2017, SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37, which became effective on December 1, 2017 and abolished SAT Circular 698 as well as certain provisions in SAT Circular 7. The SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax. Pursuant to SAT Bulletin 37, where the party responsible to withhold such income tax did not or was unable to withhold, and the non-resident enterprise receiving such income failed to declare and pay the taxes that should have been withheld to the relevant tax authority, both of such parties may be subject to penalties.

 

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries or investments. Our company may be subject to filing obligations or taxed or subject to withholding obligations in such transactions, under SAT Public Notice 7 and SAT Bulletin 37. For transfer of shares in our company by investors that are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Public Notice 7 and SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Public Notice 7 and SAT Bulletin 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

 

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, our investors are deprived of the benefits of such inspection.

 

59


Table of Contents

 

Our independent registered public accounting firm that issues the audit report included in our annual report filed with 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 by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a heightened interest in an issue that has vexed U.S. regulators in recent years. However, it remains unclear what further actions the SEC and PCAOB will take and its impact on Chinese companies listed in the U.S. On April 21, 2020, the SEC and the PCAOB issued another joint statement reiterating the greater risk that disclosures will be insufficient in many emerging markets, including China, compared to those made by U.S. domestic companies. In discussing the specific issues related to the greater risk, the statement again highlights the PCAOB’s inability to inspect audit work paper and practices of accounting firms in China, with respect to their audit work of U.S. reporting companies. On June 4, 2020, the U.S. President issued a memorandum ordering the President’s Working Group on Financial Markets to submit a report to the President within 60 days of the memorandum that includes recommendations for actions that can be taken by the executive branch and by the SEC or PCAOB on Chinese companies listed on U.S. stock exchanges and their audit firms, in an effort to protect investors in the U.S.

 

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.

 

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress, which if passed, would require the SEC to maintain a list of issuers for which the PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The proposed Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges of issuers included on the SEC’s list for three consecutive years.  On May 20, 2020, the U.S. Senate passed S. 945, the Holding Foreign Companies Accountable Act (the “Kennedy Bill”).  If passed by the U.S. House of Representatives and signed by the U.S. President, the Kennedy Bill would amend the Sarbanes-Oxley Act of 2002 to direct the SEC to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded “over-the-counter” if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for three consecutive years after the law becomes effective.  Enactment of any of such legislations or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, the market price of our ADSs could be adversely affected, and we could be delisted if we are unable to cure the situation to meet the PCAOB inspection requirement in time. It is unclear if and when any of such proposed legislations will be enacted. Furthermore, there have been recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such deliberations were to materialize, the resulting legislation may have material and adverse impact on the stock performance of China-based issuers listed in the United States.

 

Proceedings instituted by the SEC against five PRC-based accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

 

60


Table of Contents

 

Starting in 2011 the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and PRC law. Specifically, for certain U.S.-listed companies operating and audited in the PRC, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under PRC law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the China Securities Regulatory Commission, or the CSRC.

 

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioners had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Under the terms of the settlement, the underlying proceeding against the four PRC-based accounting firms was deemed dismissed with prejudice at the end of four years starting from the settlement date, which was February 6, 2019. We cannot predict if the SEC will further challenge the four PRC-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions. If additional challenges are imposed on the Chinese affiliates of the “big four” accounting firms, our ability to timely file future financial statements in compliance with the requirements of the Exchange Act may be adversely affected.

 

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, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our ADSs may be adversely affected.

 

If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC 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 Nasdaq Global Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

 

Risks Related to Our American Depositary Shares

 

The market price for our ADSs may be volatile.

 

The trading prices of our ADSs are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of other listed companies based in China that have listed their securities in the United States in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in their trading prices. The trading performances of other Chinese companies’ securities after their offerings may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the trading performance of our ADSs, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. In addition, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, such as the large decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009 and the second half of 2011, which may have a material adverse effect on the market price of our ADSs.

 

61


Table of Contents

 

In addition to the above factors, the price and trading volume of our ADSs may be highly volatile due to multiple factors, including the following:

 

·                  regulatory developments affecting us, our users, or our industry;

 

·                  conditions in the online consumer finance industries and online wealth management industry;

 

·                  announcements of studies and reports relating to the quality of our product and service offerings or those of our competitors;

 

·                  changes in the economic performance or market valuations of other online consumer finance and online wealth management companies;

 

·                  actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

 

·                  changes in financial estimates by securities research analysts;

 

·                  announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures or capital commitments;

 

·                  additions to or departures of our senior management;

 

·                  detrimental negative publicity about us, our management or our industry;

 

·                  fluctuations of exchange rates between the Renminbi and the U.S. dollars;

 

·                  release or expiry of lock-up or other transfer restrictions on our outstanding Class A ordinary shares or ADSs; and

 

·                  sales or perceived potential sales of additional Class A ordinary shares or ADSs.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ADSs and trading volume could decline.

 

The trading market for our ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who cover us downgrade our ADSs or publish inaccurate or unfavorable research about our business, the market price for our ADSs would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for 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 discretion as to whether to distribute dividends, subject to certain restrictions under the Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend 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. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. 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 subsidiary, 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 in our ADSs.

 

62


Table of Contents

 

Our dual-class share structure with different voting rights and the restriction on transfer of Class B ordinary shares will limit 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 authorized share capital is divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to five votes per share. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B ordinary share by a holder thereof to any non-affiliate to such holder, or upon a change of control of any Class B ordinary share to any person who is not an affiliate of the registered holder of such Class B ordinary share, each of such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary share.

 

Mr. Lei Sun, the chairman of our board of directors and our chief executive officer, beneficially owns an aggregate of 64,433,465 ordinary shares, representing in aggregate 66.8% of our total voting power as of June 15, 2020. Consequently, Mr. Sun will be able to significantly influence matters requiring shareholders’ approval such as electing directors and approving material mergers, acquisitions or other business combination transactions. The dual-class share structure will also allow Mr. Sun to have significant influence on requisition of extraordinary general meeting of shareholders and quorum required for general meeting of shareholders. See “Item 10. Additional Information—Our Post-Offering Memorandum and Articles of Association—“Voting Rights” and “General Meetings of Shareholders and Shareholders Proposals” for details. Mr. Sun may take actions that are not in the best interest of us or our other shareholders. This concentration of voting power and the restriction on transfer of Class B ordinary share may also discourage, delay or prevent a change in control of our company, which could have the dual effect of depriving our other shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and reducing the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders. In addition, Mr. Sun could divert business opportunities away from us to himself or others. For more information regarding our principal shareholders and their affiliated entities, see “Item 6. Directors, Senior Management and Employees — E. Share Ownership.”

 

The dual-class structure of our ordinary shares may adversely affect the trading market for the ADSs.

 

S&P Dow Jones and FTSE Russell have changed their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total voting power from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual-class structure of our ordinary shares may prevent the inclusion of the ADSs representing our Class A ordinary shares in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for the ADSs representing our Class A ordinary shares. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of the ADSs.

 

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

 

63


Table of Contents

 

Sales of our ADSs in the public market after our initial public offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. All ADSs sold in the initial public offering are freely transferable without restriction or additional registration under the Securities Act. The remaining ordinary shares outstanding after the initial public offering are available for sale, upon the expiration of the 180-day lock-up period beginning from the date of our initial public offering, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act.  To the extent these shares are sold into the market, the market price of our ADSs could decline.

 

Certain holders of our ordinary shares may cause us to register under the Securities Act the sale of their shares, subject to certain lock-up requirements. 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.

 

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

 

As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which attach to the underlying Class A ordinary shares which are represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary, as the holder of the underlying Class A ordinary shares which are represented by your ADSs. Upon receipt of your voting instructions, the depositary will endeavor to vote the Class A underlying Class A ordinary shares in accordance with your instructions in the event voting is by poll, and in accordance with instructions received from a majority of holders of ADSs who provide instructions in the event voting is by show of hands. The depositary will not join in demanding a vote by poll. You will not be able to directly exercise any right to vote with respect to the underlying Class A ordinary shares unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting. Under our sixth amended and restated memorandum and articles of association, the minimum notice period required to be given by our company to our registered shareholders for convening a general meeting is seven days. When a general meeting is convened, you may not receive sufficient advance notice to enable you to withdraw the underlying Class A ordinary shares which are represented by your ADSs and become the registered holder of such shares prior to the record date for the general meeting to allow you to attend the general meeting or to vote directly with respect to any specific matter or resolution which is to be considered and voted upon at the general meeting. In addition, under our sixth amended and restated memorandum and articles of association, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the underlying shares which are represented by your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. Where any matter is to be put to a vote at a general meeting, the depositary will, if we request, and subject to the terms of the deposit agreement, endeavor to notify you of the upcoming vote and 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 underlying shares which are 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. This means that you may not be able to exercise your right to direct the voting of the underlying Class A ordinary shares which are represented by your ADSs, and you may have no legal remedy if the underlying Class A ordinary shares are not voted as you requested.

 

Except in limited circumstances, the depositary for our ADSs will give us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs if you do not instruct the depositary how to vote such shares, which could adversely affect your interests.

 

Under the deposit agreement for our ADSs, the depositary will give us (or our nominee) a discretionary proxy to vote our Class A ordinary shares underlying your ADSs at shareholders’ meetings if you do not give voting instructions to the depositary as to how to vote the Class A ordinary shares underlying your ADSs at any particular shareholders’ meeting, unless:

 

64


Table of Contents

 

·                  we have failed to timely provide the depositary with our notice of meeting and related voting materials;

 

·                  we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

·                  we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

·                  a matter to be voted by the discretionary proxy on at the meeting may have an adverse impact on shareholders; or

 

·                  voting at the meeting is made on a show of hands.

 

The effect of this discretionary proxy is that, if you fail to give voting instructions to the depositary as to how to vote the Class A ordinary shares underlying your ADSs at any particular shareholders’ meeting, you cannot prevent our Class A ordinary shares underlying your ADSs from being voted at that meeting, absent the situations described above, and it may make it more difficult for shareholders to influence our management. Holders of our ordinary shares are not subject to this discretionary proxy.

 

Your rights to pursue claims against the depositary as a holder of ADSs are limited by the terms of the deposit agreement and the deposit agreement may be amended or terminated without your consent.

 

Under the deposit agreement, any action or proceeding against or involving the depositary, arising out of or based upon the deposit agreement or the transactions contemplated thereby or by virtue of owning the ADSs may only be instituted by you in a state or federal court in New York, New York, and you, as a holder of our ADSs, will have irrevocably waived any objection which you may have to the laying of venue of any such proceeding, and irrevocably submitted to the exclusive jurisdiction of such courts in any such action or proceeding instituted by any person. Also, we may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended. See “Item 12. Description of Securities Other than Equity Securities—D. American Depositary Shares” for more information.

 

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

 

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make such rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings in the future and may experience dilution in your holdings.

 

You may not receive dividends or other distributions on our Class A 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 our Class A ordinary shares or other deposited securities underlying our 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 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, Class A 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, Class A 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.

 

65


Table of Contents

 

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 transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it 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.

 

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

 

We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, a majority of our directors and executive officers reside within China, and most of the assets of these persons are located within China. As a result, it may be difficult or impossible for you to effect service of process within the United States upon these individuals, or to bring an action against us or against these individuals in the United States in the event that you believe 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 the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers.

 

It may be difficult for overseas regulators to conduct investigation or collect evidence within China.

 

Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests. See also “ —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 incorporated under the Cayman Islands law” for risks associated with investing in us as a Cayman Islands company.

 

ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

 

The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.

 

If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before entering into the deposit agreement.

 

66


Table of Contents

 

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.

 

Nevertheless, if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

 

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 incorporated under the Cayman Islands law.

 

We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2020 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 (save for our memorandum and articles of association) or to obtain copies of lists of shareholders of these companies. Our directors will have discretion under the memorandum and 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. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder resolution or to solicit proxies from other shareholders in connection with a proxy contest.

 

As a result of all of the above, our 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.

 

Our memorandum and articles of association contains anti-takeover provisions that could discourage a third party from acquiring us and adversely affect the rights of holders of our Class A ordinary shares and ADSs.

 

Our memorandum and articles of association contain certain provisions that could limit the ability of others to acquire control of our company, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our shareholders and ADS holders of the opportunity to sell their shares or ADSs at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.

 

67


Table of Contents

 

Our directors and officers have substantial influence over our company and their interests may not be aligned with the interests of our other shareholders.

 

Our directors and officers collectively own an aggregate of 84.7% of our total voting power as of June 15, 2020. See “Item 6. Directors, Senior Management and Employees — E. Share Ownership.” As a result, they have substantial influence over our business, including significant corporate actions such as mergers, consolidations, election of directors and other significant corporate actions.

 

They may take actions that are not in the best interest of us or our other shareholders. This concentration of voting power may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of the ADSs. These actions may be taken even if they are opposed by our other shareholders. In addition, the significant concentration of share ownership may adversely affect the trading price of the ADSs due to investors’ perception that conflicts of interest may exist or arise.

 

We are an emerging growth company 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 various 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 of Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

 

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 financial 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 U.S. domestic public companies.

 

Because we qualify as 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:

 

·                  the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

 

·                  the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;

 

·                  the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

·                  the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

 

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 intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the Nasdaq Stock Market. 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 that would be made available to you were you investing in a U.S. domestic issuer.

 

68


Table of Contents

 

As an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq’s corporate governance requirements; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the Nasdaq’s corporate governance requirements.

 

As a Cayman Islands exempted company listed on the Nasdaq Global Market, we are subject to the Nasdaq listing standards. Section 5605(b)(1) of the Nasdaq Listing Rules requires listed companies to have, among other things, a majority of its board members to be independent. However, the Nasdaq Stock Market Rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. We followed home country practice with respect to the independence requirements for the majority of the board being independent.

 

Our shareholders may be afforded less protection than they would otherwise enjoy under the Nasdaq listing standards applicable to U.S. domestic issuers given our reliance on the home country practice exception.

 

We are a “controlled company” within the meaning of the Nasdaq Stock Market Rules and, as a result, can rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.

 

We are a “controlled company” within the meaning of the Nasdaq Stock Market Rules because Mr. Lei Sun, the chairman of our board of directors and our chief executive officer, owns more than 50% of our total voting power as of March 31, 2020. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules. As a result, you may not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

 

We believe that we were a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our taxable year ended December 31, 2019, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or ordinary shares.

 

Based on the market price of our ADSs and composition of our assets (in particular the retention of a substantial amount of cash), we believe that we were a “passive foreign investment company,” or “PFIC,” for U.S. federal income tax purposes for our taxable year ended December 31, 2019, and we will likely be a PFIC for our current taxable year ending December 31, 2020 unless the market price of our ADSs increases and/or we invest a substantial amount of cash and other passive assets we hold in assets that produce or are held for the production of non-passive income. A non-U.S. corporation will be considered a PFIC for any taxable year if either (1) 75% or more of its gross income for such year consists of certain types of “passive” income or (2) 50% or more of the average quarterly value of its assets (as generally determined on the basis of fair market value) during such year produce or are held for the production of passive income.

 

If we were to be classified as a PFIC in any taxable year, a U.S. Holder (as defined in Item 10. Additional Information—E. —Taxation—United States Federal Income Taxation) may incur significantly increased United States 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 U.S. federal income tax rules. Furthermore, a U.S. Holder will generally be treated as holding an equity interest in a PFIC in the first taxable year of the U.S. Holder’s holding period in which we become a PFIC and subsequent taxable years even if, we, in fact, cease to be a PFIC in subsequent taxable years. Accordingly, a U.S. Holder of our ADSs or ordinary shares is urged to consult its tax advisor concerning the U.S. federal income tax consequences of an investment in our ADSs or ordinary shares, including the possibility of making a “mark-to-market” election. For more information, see “Item 10. Additional Information — E. Taxation — United States Federal Income Taxation.

 

69


Table of Contents

 

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

 

We are a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the Nasdaq Stock Market, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.07 billion in net revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to “opt out” of the provision that allow us to delay adopting new or revised financial accounting standards and, as a result, we will comply with new or revised financial 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 expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s 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, which could harm our results of operations and require us to incur significant expenses to defend the suit. 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.

 

ITEM 4. INFORMATION ON THE COMPANY

 

A.                                    History and Development of the Company

 

We initially conducted our business through Jiufu Shuke Technology Group Co., Ltd. (“Jiufu Shuke,” formerly known as Beijing Jiufu Times Investment Consulting Co., Ltd., Jiufu Internet Finance Holdings Group Co., Ltd. and Jiufu Jinke Holdings Group Co., Ltd., successively), a PRC company incorporated in December 2006.

 

We restructured our corporate organization in 2014. In January 2014, we incorporated our current holding company in the Cayman Islands under the name of JIUFU Financial Technology Service Limited, which was later changed to 9F Inc. in June 2014. In February 2014, we incorporated JIUFU Financial Information Service Limited in Hong Kong (“9F HK”), as a wholly-owned subsidiary of 9F Inc. We incorporated Beijing Jiufu Lianyin Technology Co., Ltd. (“Jiufu Lianyin”), in June 2014 and Shanghai Jiufu Network Co., Ltd., in August 2014 in China as wholly owned subsidiaries of 9F HK.

 

In August 2014, Jiufu Lianyin obtained effective control over Jiufu Shuke and Beijing Puhui Lianyin Information Technology Co., Ltd. (“Beijing Puhui”), a consolidated affiliated entity incorporated in January 2014 through a series of contractual arrangements. In July 2015, August 2015 and May 2020, we amended and restated some of the abovementioned contracts with then existing shareholders of Jiufu Shuke and Beijing Puhui.  In April 2020, Zhuhai Xiaojin Hulian Technology Co., Ltd. (“Xiaojin Hulian”), Beijing Diyi Technology Co., Ltd. (“Beijing Diyi”) and Zhuhai Wukong Youpin Technology Co., Ltd. (“Wukong Youpin”), each a wholly-owned subsidiary of us in China (Xiaojin Hulian, Beijing Diyi, Wukong Youpin, together with Jiufu Lianyin, the “WFOEs”), obtained effective control over Zhuhai Huike Lianyin Technology Co., Ltd. (“Zhuhai Lianyin”), Beijing Jiufu Meihao Technology Co., Ltd. (“Jiufu Meihao”) and Beijing Wu Kong Mao Technology Co., Ltd. (“Wu Kong Mao,” formerly known as Beijing Chaoka Internet Technology Co., Ltd.) respectively through a series of new contractual arrangements. As a result of our direct ownership in our WFOEs and the contractual arrangements with Beijing Puhui, Jiufu Shuke, Zhuhai Lianyin, Jiufu Meihao and Wu Kong Mao, which are our VIEs, we will be regarded as the primary beneficiary of our VIEs, and may treat them as our consolidated affiliated entities under U.S. GAAP. Accordingly, we will be able to consolidate the financial results of our VIEs in our consolidated financial statements in accordance with U.S. GAAP.

 

70


Table of Contents

 

We restructured certain of our VIEs and their subsidiaries in April 2020 and currently conduct substantially all of our operations through our PRC and Hong Kong subsidiaries and our consolidated affiliated entities and their subsidiaries. We established three new VIEs, Wu Kong Mao, Jiufu Meihao and Zhuhai Lianyin to develop our E-commerce and local life servicing platform, online wealth management product related business and consumer finance related technology services. The online lending platform business, a major part of our business, is mainly conducted by Beijing Jiufu Puhui Information Technology Co., Ltd. (“Jiufu Puhui”), a wholly owned subsidiary of Jiufu Shuke. The loan products related business is mainly conducted by Xinjiang Teyi Shuke Information Technology Co., Ltd. (“Xinjiang Shuke”, formerly known as Xinjiang Jiufu Onecard Information Technology Co., Ltd.), a wholly owned subsidiary of Wu Kong Mao through Beijing Lirongxing Commercial Trading Co., Ltd., (“Beijing Lirongxing”), and Zhuhai Onecard Xiaojin Technology Co., Ltd. (“Zhuhai Xiaojin”, formerly known as Zhuhai Jiufu Xiaojin Technology Co., Ltd.), a wholly owned subsidiary of Zhuhai Lianyin. Jiufu Lianyin provides technical support to our operations.

 

We started to offer offshore stock investment products to provide investors with access to stock trading opportunities in Hong Kong and the U.S. through 9F Primasia Securities Limited, or 9F Primasia Securities, after we acquired the majority of its equity interest in August 2016. In 2018, we started to engage in stock distribution business and provide investors with access to stock subscription opportunities in Hong Kong through 9F Primasia Securities. We provide insurance brokerage business in Hong Kong through 9F Wealth Management Limited, a company we acquired in July 2017.

 

On August 15, 2019, our ADSs commenced trading on the Nasdaq Global Market under the symbol “JFU.” We raised from our initial public offering approximately US$57.7 million in net proceeds after deducting underwriting commissions and discounts and the offering expenses payable by us.

 

Our principal executive offices are located at Jiufu Building, Rongxin Technology Center, Chaoyang District, Beijing 100102, People’s Republic of China. Our telephone number at this address is +86 +86 (10) 8527-6996. Our registered office in the Cayman Islands is located at Maples Corporate Services Limited, P.O. Box 309, Ugland House Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is Cogency Global Inc., located at 122 East 42nd Street, 18th Floor, New York, NY 10168.

 

The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding us that filed electronically with the SEC, which can be accessed at http://www.sec.gov. Our annual reports, quarterly results, press release and other SEC filings can also be accessed via our investor relationship website at http:// http://ir.9fgroup.com/.

 

B.                                    Business Overview

 

We are a leading digital financial account platform integrating and personalizing financial services in China with the footprint expanding overseas. We provide a comprehensive range of financial products and services across loan products, online wealth management products, and payment facilitation, all integrated under a single digital financial account.

 

71


Table of Contents

 

Our Products and Services

 

Digital Financial Account

 

We offer a single digital financial account for each user on our digital financial account platform, providing a comprehensive range of financial products and services. Our digital financial account provides a one-stop digital solution for users to address many of their financial needs including online lending, online wealth management and payment facilitation.

 

In addition, our digital financial account platform lays the foundation for a convenient transition in our users’ activities with us. While some of our users started as borrowers on our platform, as they continue to accumulate their personal wealth, they can also take advantage of our online wealth management products at later stages of their financial lifecycle. At the same time, investors may also tap into our loan products from time to time to finance their consumption at an affordable cost.

 

Loan Products

 

We offer loan products to borrowers. The loan products we offer to borrowers are funded by investors and institutional funding partners. Our loan products are generally unsecured. For revolving loan products and non-revolving loan products, our credit decisions are typically made within three minutes for first-time applicants and in real-time for repeat borrower drawdowns within the approved credit limits. Loan disbursements generally occur on the business day after the loan application is approved. For our revolving loan products, borrowers may take out multiple loans within their approved credit limits. These features are essential to meet the borrowers’ time-sensitive and recurring financial needs.

 

As of December 31, 2017, 2018 and 2019, the total outstanding loan balance was RMB45.7 billion, RMB52.0 billion and RMB76.0 billion (US$10.9 billion), respectively.

 

Revolving Loan Products

 

We offer a revolving loan product through One Card. In approving a One Card user, we make the credit decision regarding whether to extend credit, how much credit to extend (the credit limit) and the borrowing cost based on our review of the user’s credit profile. We conduct credit re-assessment for each drawdown of the revolving loan products and charge service fee for each drawdown. Please refer to “—Risk Management—Our Proprietary Credit Assessment Process—Proprietary Credit Scoring and Risk Pricing Models” and “—Risk Management—Our Proprietary Credit Assessment Process—Translating Credit Assessment into Pricing.”

 

Our One Card users draw upon approved credit limits to make online and offline transactions with our merchant partners. The approved credit limits can also be drawn to meet the users’ other financial needs.

 

·                  Online: Users can draw upon approved credit limits to purchase goods on the 9F One Mall, our proprietary online shopping platform providing products from third-party e-commerce platforms. Users can also withdraw cash from the approved credit limits to meet other financial needs.

 

·                  Offline: We partner with China UnionPay, China’s largest card payment organization, as well as commercial banks to offer virtual credit solutions through which our users may draw upon approved credit limits for general offline payments to merchants connected by China UnionPay.

 

The approved credit limits of our revolving loan products do not exceed RMB200,000 (US$28,728.2). In 2017, 2018 and 2019, we originated RMB43.2 billion, RMB40.3 billion and RMB16.3 billion (US$2.3 billion), respectively, in revolving loan products. The loans originated by us under our revolving loan products in 2017, 2018 and 2019 had an annualized interest rate ranging from 7.0% to 16.0%. The weighted average sizes of the loans originated by us under our revolving loan products in 2017, 2018 and 2019 were RMB7,960, RMB5,668 and RMB5,751 (US$826.1), respectively. The applicable terms of our revolving loan products are 1 to 48 months.

 

We set user borrowing costs for our revolving loan products based on a proprietary, tiered credit pricing model. Please refer to “—Risk Management—Our Proprietary Credit Assessment Process—Proprietary Credit Scoring and Risk Pricing Models.” Key factors include the borrowers’ credit history, transactional behaviors and other underwriting factors.

 

72


Table of Contents

 

For our revolving loan products under our Online Lending Information Intermediary Services, the typical borrowing cost payable by borrowers for loans originated until February 2020 included (i) interest payable to investors, (ii) service fees charged by us for our loan facilitation services and post-origination services, (iii) post-loan service fees payable to third-party collection companies for loan collection services and arbitration services, and (iv) an insurance premium to be paid to the insurer until November 2019 or money contribution to the depository account which was set up by Guangdong Success, an independent third party, and the guarantee fee to be paid to Guangdong Success for the guarantee services provided, as the case may be. For loan originated since February 2020, the typical borrowing coast payable by borrowers includes (i) interest payable to investors, (ii) service fees charged by us for our loan facilitation services and post-origination services, (iii) post-loan service fees payable to third-party collection companies for loan collection services and arbitration services, and (iv) money contribution to the depository account which was set up by Zhongtian Guarantee, an independent third party. Loan principal, interests and other borrower payables, if applicable, are repaid on monthly basis. Prepayments require our pre-approval. We set prepayment fees at the rate negotiated with the borrower on a case-by-case basis. Borrowers are subject to penalty fees for late payment. Prepayment fees and penalty fees, each if applicable, are part of borrowing cost that a borrower is subject to. Prepayment fees and penalty fees for our Online Lending Information Intermediary Services were paid to the depository account set up by Guangdong Success for loans originated before February 2020. For loans originated after February 2020, prepayment fees and penalty fees for our Online Lending Information Intermediary Services are paid to the depository account that was set up by Zhongtian Guarantee. Please refer to “—Risk Management—Investor Protection Mechanism.”

 

Non-revolving loan products

 

We offer fixed-term loan products that cover key consumption verticals such as home improvement, education, elective medical care services and consumer electronics. These loan products are often offered by us in collaboration with leading consumption-based lending platforms, including home improvement, education and elective medical care services.

 

The terms of our non-revolving loan products do not exceed 48 months. In 2017, 2018 and 2019, we originated RMB14.2 billion, RMB4.5 billion and RMB3.9 billion (US$0.6 billion) of non-revolving loan products, respectively. The loans originated by us under our non-revolving loan products in 2017, 2018 and 2019 had an annualized interest rate ranging from 6.0% to 19.0%. The weighted average sizes of the loans originated by us under our non-revolving loan products in 2017, 2018 and 2019 were RMB5,968, RMB7,624 and RMB5,040 (US$724.0), respectively. The applicable terms of our non-revolving loan for products are 1 to 48 months.

 

We price our non-revolving products under our Online Lending Information Intermediary Services similarly to how we price our revolving loan products. In addition, the repayment of loan principal and interests, and the payment of prepayment fees and penalty fees, if applicable, are similar to the same under our revolving loan products. See “—Our Products and Services—Loan Products—Revolving Loan Products.”

 

Direct lending program

 

Loan products funded by institutional funding partners count towards loan products under our direct lending program. We have been developing our direct lending program rapidly since 2018 and intend to cooperate with more institutional funding partners to further strengthen and diversify our funding sources. We currently provide traffic referral and risk management services to institutional funding partners in collaboration with financing guarantee companies allowing the institutional funding partners to access to borrowers who passed our risk assessment. Our cooperation with PICC on new loans under our direct lending program has been suspended since December 2019. For details, please refer to “—Users and Partners—Financial Institution Partners—Institutional Funding Partners.”

 

The typical borrowing cost payable by borrowers under our direct lending program includes (i) interest payable to our institutional funding partners, (ii) service fees charged by us directly from the borrowers until April 2019, and (iii) an insurance premium to be paid to PICC until December 2019 or guarantee fees to be paid to financing guarantee companies starting from September 2019. Loan principal, interests and other borrower payables, if applicable, are repaid on monthly basis. Institutional funding partners approve the prepayments and set the rate of prepayment fees. Borrowers are subject to penalty fees for late payment. Prepayment fees and penalty fees, each if applicable, are part of borrowing cost that a borrower is subject to. Prepayment fees and penalty fees are paid to our institutional funding partners.

 

73


Table of Contents

 

In 2017, 2018 and 2019, we originated RMB109.6 million, RMB749.3 million and RMB34,901.7 million (US$5,013.3 million) of loan products under our direct lending program.

 

Online Wealth Management Products

 

We offer a suite of online wealth management products to investors across our online platforms, including Wukong Licai9F Wallet (formerly known as Jiufu Jinrong) and 9F Puhui. Our original online wealth management product was a fixed income product representing the loans we facilitate. In 2017, we expanded our product suite to include onshore and offshore investment options including stock, insurance, bank wealth management products and mutual funds. Fixed income products currently constitute a significant portion of the online wealth management products we offer. We are also actively diversifying our online wealth management products by offering an increasing amount of other types of investment products such as stock, insurance, bank wealth management products and fund investment products, and the investment amounts under other onshore and offshore investment products are on the rise.

 

Fixed income products

 

Our fixed income products represent investments in the loans we facilitate primarily through One Card. An investor can individually invest in the loans through our self-directed investing tool, or they can invest by leveraging our automated investing tool. We charge investors service fees. The minimum investment amount of our fixed income products is RMB100.0 (US$14.4).

 

In 2017. 2018 and 2019, our fixed income investment volumes were RMB88.9 billion, RMB82.2 billion and RMB65.7 billion (US$9.4 billion), respectively. This represented a per-investor average of approximately RMB73.5 thousand, RMB95.3 thousand and RMB129.8 thousand (US$18.6 thousand), respectively during the same periods. The average annualized rates of return of our fixed income products were 9.6%, 8.7% and 7.8% in 2017 and 2018 and 2019, respectively.

 

Other onshore and offshore investment products

 

In 2017, we began offering, and expect to offer, an increasing amount of onshore and offshore investment products including stock, insurance, bank wealth management products and fund investment products:

 

·                  Stock Investment:  We engage in stock distribution and offer offshore stock investment products to provide investors with access to stock subscription and trading opportunities in Hong Kong through 9F Benben, a proprietary platform operated by 9F Primasia Securities. Through 9F Benben, we also provide investors with access to stock trading opportunities in the U.S.

 

·                  Insurance:  We offer offshore insurance products such as medical insurance products and education insurance products through 9F Wealth Management Limited, an insurance broker operating in Hong Kong. We started to sell onshore insurance products through Jiuxing Insurance (a company incorporated in China and formerly known as Ruifeng Insurance) in the fourth quarter of 2019 and suspended the sales due to our business adjustment in 2020.

 

·                  Bank wealth management products: Starting from the second half of 2019, we sell bank wealth management products of PRC banks through our online platforms, such as Wukong Licai and 9F Wallet.

 

·                  Fund Investment:  We offer fund investment solutions through fund distribution platforms, notably CSJ Golden Bull, a nationally-recognized fund rating and distribution platform and also one of our associated companies.

 

74


Table of Contents

 

Investing Tools—Automated

 

Our investors can leverage our automated investing tools to invest in fixed income products. With our automated investing tools, an investor agrees to invest a specified amount of money (investment balance) to borrowers through our platform for a specified period of time (investment commitment period) with an expected rate of return. Once an investor commits funds using the tool, his or her funds are automatically allocated among approved borrowers. As an underlying loan is repaid within the investment commitment period, the realized funds will be automatically reinvested according to the investors’ preset investing criteria. If an investment commitment period ends during the term of an underlying loan, we will facilitate the investor’s exit on the investor’s behalf by transferring his or her rights with respect to the underlying loans. Our automated investors tools will then arrange such loans to be funded by new investors making investments in our fixed income products, whom we match to the underlying borrower. There is no guarantee that the transfer of the underlying loans at the end of the investment commitment period will be arranged successfully.

 

We offer fixed-income products with investment commitment periods mainly ranging from three months to four years with expected rates of return ranging from 6.0% to 12.0% per annum and a minimum commitment amount of RMB100. An investor will be repaid the principal and interest at the end of the investment commitment period which is non-extendable. However, an investor may elect to reinvest his or her funds in the form of subscription for a new fixed-income product before or upon the end of the current investment commitment period.

 

If a cash-out request is made by an investor within the investment commitment period, we have discretion to handle the transfer request on a case-by-case basis. Before October 2019, if the transfer was arranged successfully, the investor would receive the principal and the accrued interest as determined by the actual investment period, and we would charge an investor service fee for early termination. Since October 2019, if a cash-out request made by an investor within the investment commitment period meets our pre-set conditions, such as humanism or system failure, and the loan transfer is therefore arranged successfully, the investor would only receive the principal, while we would not charge service fees for early termination. There is no guarantee that the reinvestment and the transfer request of a loan made within the investment commitment period will be arranged successfully.

 

For 2019, the investments made through automated investing tools accounted for 99.6% of the total fixed income investment volume. In 2017 and 2018 and 2019, the average annualized rates of return for those investments were 9.6%, 8.7% and 7.8%, respectively.

 

Investing Tools—Self-directed

 

Our investors can also leverage our self-directed investing tool to invest in fixed income products. Our self-directed investing tool enables investors to manually select investment opportunities among approved borrowers posted on our platform. After selecting a desired loan, the investor then agrees to commit a certain amount of funds to a specific borrower through our platform until the maturity of the loan. Funds are transferred through the custodian bank from an investor’s account to a borrower’s account once the loan is fully subscribed. Any investor who wants to withdraw committed funds prior to the maturity of the loan may transfer his or her rights in the loan on his or her own initiative. There is no guarantee that the transfer requests made prior to the maturity of the loans will be arranged successfully. For 2019, the investments made through self-directed investing tools accounted for 0.4% of the total fixed income investment volume.

 

Payment facilitation and other products and services

 

We help our One Card users pay credit card bills and household bills such as utilities bills using approved credit limits under One Card. In addition, we provide other value-added services including credit history search, debt consolidation and user referral services. We also provide our advanced technologies to our customers. In 2019, we officially launched our proprietary platform, 9F Superbrain, that integrates our core artificial intelligence, cloud and blockchain technologies. 9F Superbrain provides our financial institution partners and merchant partners with highly customized modularized service packages. We have also launched a SaaS version of this platform to drive our expansion into South East Asia and other international markets. We commenced online direct sales of upscale products in the first quarter of 2019 and terminated such sales in the third quarter of 2019.

 

75


Table of Contents

 

Our E-Commerce Channels

 

We have established e-commerce channels to connect our users and merchant partners, and facilitate loans. Users may purchase goods offered by third-party merchant partners on our 9F One Mall (formerly known as the “One Card Mall”), a proprietary online shopping platform of pre-approved merchants and products accessible via a user’s mobile device. Our collective product suite is specifically oriented towards our financially literate, creditworthy user base and includes competitively-priced, albeit higher value, items across 15 major product categories such as mobile phones, electronics, fashion accessories, cosmetics, as well as various life servicing products such as mobile phone recharge services and ticketing services. We process the purchase orders placed through 9F One Mall by passing the relevant orders to the merchant partners and subsequently settle the payments to merchant partners. Our merchant partners are responsible for storage and delivery of products. This arrangement allows us to develop and grow our e-commerce channels without building our own fulfillment infrastructure for warehousing and delivery.

 

We have been rapidly developing our E-commerce channels since the end of 2019. We rebranded our 9F One Mall to a wider user base, targeting customers of not only One Card users. We also connect more local life servicing consumption scenarios in connection with the verticals of health, entertainment, and tourism. As of December 31, 2019, registered users on 9F One Mall reached approximately 5.3 million.

 

Our e-commerce channels are essential to our ecosystem connecting borrowers, merchant partners, investors and financial institution partners. Moreover, the e-commerce channels play integral roles in our risk management by tracking a borrower’s use of loan proceeds while collecting behavioral data.

 

Users and Partners

 

Users are drawn to our platform for access to financial products, including loan products and online wealth management products, concisely delivered and managed through a digital financial account. Our platform encourages personal financial development and maturity, which we believe is evidenced by the fact that we are more often seeing borrowers evolve into investors on our platform. See “—Our Products and Services—Digital Financial Account.”

 

Partners, both merchants and institutional funding partners, are drawn to our platform for access to our users in the context of a high-quality ecosystem.

 

Our Borrowers

 

We aim to serve young and financially literate borrowers underserved by traditional financial institutions. The number of active borrowers increased from approximately 1.3 million in 2016 to approximately 3.6 million in 2017, and decreased to approximately 2.3 million in 2018 due to the challenging regulatory environment negatively affecting the growth of our business. The number of active borrowers in 2019 was 2.8 million.

 

Our borrower base is young, with nearly 75.8% between 18 to 35 years old as of December 31, 2019.

 

Our Investors

 

Our investors directly invest through our online wealth management platforms which include Wukong Licai9F Wallet and 9F Puhui. The number of active investors decreased from 1.2 million in 2017 to 0.9 million in 2018, and further decreased to 0.5 million in 2019 due to the challenging regulatory environment negatively affecting the growth of our business.

 

As with our borrowers, our investors tend to be young with approximately 46.6% of our investors between 20 to 35 years old as of December 31, 2019. We have consistently achieved high repeat investment rates. Our repeat investment rates were 84.3%, 90.8% and 96.0%, respectively, in 2017, 2018 and 2019, respectively.

 

In 2017, 2018 and 2019, the average investment amount per investor was RMB73.5 thousand, RMB95.3 thousand and RMB129.8 thousand (US$18.6 thousand), respectively. As of December 31, 2019, approximately 4.1% of the investors maintained an investment balance above RMB500 thousand.

 

76


Table of Contents

 

In 2017, 2018 and 2019, our investors funded RMB57.4 billion, RMB44.9 billion and RMB20.2 billion (US$2.9 billion), respectively, in the loans we originated to borrowers, and not taking into consideration of reinvestments made by investors. As of December 31, 2019, our investors funded RMB50.3 billion (US$7.2 billion) of our total outstanding loan balance.

 

Financial Institution Partners

 

Financial institution partners include institutional funding partners under our direct lending program, and other financial institutions that provide insurance and guarantee protection to our investors and institutional funding partners. Our cooperation with PICC on new loans under our direct lending program has been suspended since December 2019. We have been developing our direct lending program rapidly since 2018 and intend to cooperate with more institutional funding partners to further strengthen and diversify our funding sources.

 

Institutional funding partners

 

Starting from 2016, we began to diversify our funding sources by introducing institutional funding partners under our direct lending program. We referred qualified borrowers directly to our institutional funding partners. Our institutional funding partners, after completing their internal risk assessment and loan approval procedures, made the final credit decisions and fund borrowers’ loans directly.

 

In 2018, we upgraded our direct lending program introducing a tri-party cooperation model where we, PICC, when it was engaged as an insurance company providing credit insurance, and the institutional funding partner leveraged each other’s respective capabilities and to collectively delivered a competitive credit solution to borrowers. Our value proposition was enablement, where we provided our institutional funding partners access to a high-quality borrower base as well as our risk management capabilities, and in most cases, in cooperation with PICC. PICC, when it was engaged, provided credit insurance to the institutional funding partners; meanwhile, PICC benefited from our risk management capabilities to provide credit insurance on loans of high-quality borrowers. The institutional funding partners made the final credit decision based on a credit assessment and also funded and serviced the loans. We also provided services after loan origination such as repayment facilitation and loan collection. This was particularly valuable for small and medium sized financial institutions that tend to lack the scale and technology to effectively compete with the larger financial institutions. We charged service fees, while PICC, when it was engaged as an insurance company providing credit insurance, charged insurance premiums. We have suspended our cooperation with PICC on new loans under our direct lending program since December 2019.

 

Since September 2019, we have started to cooperate with financing guarantee companies, which provide guarantee services to the institutional funding partners under our direct lending program. Financing guarantee companies protect institution funding partners up to the total amount of the principal, interests and penalty fee, if applicable, to be borne by the borrowers. Our value proposition is enablement, where we provide our institutional funding partners access to a high-quality borrower base as well as our risk management capabilities in collaboration with financing guarantee companies. Financing guarantee companies provide guarantee services to institutional funding partners; meanwhile, financing guarantee companies benefit from our risk management capabilities to provide guarantee protection on loans of high-quality borrowers. The institutional funding partners make the final credit decision based on a credit assessment and also fund and service the loans. We also provide services after loan origination such as repayment facilitation and loan collection. We charge service fees, and financing guarantee companies charge guarantee fees from the borrowers.

 

In 2017, 2018 and 2019, our institutional funding partners funded RMB109.6 million, RMB749.3 million and RMB34,901.7 million (US$5,013.3 million), respectively, in the loans we originated to our borrowers. As of December 31, 2019, our institutional funding partners had approved the funding limit in the aggregate amount of over RMB94.1 billion (US$13.5 billion) under our direct lending program. Our cooperation with financial institution partners is not subject to the relevant local regulatory requirements on online lending platforms providing online lending information intermediary services, such as our company, to reduce such platforms’ business scale and number of borrowers and lenders during the administrative verification period. Therefore, our strengthened cooperation with financial institution partners may ease the pressure brought about by the continuing challenging regulatory environment that negatively affect the growth of our business. We will be increasingly focus on developing our institutional funding partner base in the future.

 

77


Table of Contents

 

Other financial institutions

 

We partner with Zhongtian Guarantee to provide guarantee services to investors for the loans we facilitate under our Online Lending Information Intermediary Services, strengthening the credibility of our platform. See “—Risk Management—Investor Protection Mechanism.” Under our direct lending program, we provide institutional funding partners access to a high-quality borrower base as well as our risk management capabilities in collaboration with financing guarantee companies; meanwhile, financing guarantee companies benefit from our risk management capabilities to provide guarantee protection on loans of high-quality borrowers. See “—Users and Partners—Financial Institution Partners—Institutional Funding Partners.”

 

Our Merchant Partners

 

We work with a large group of merchants as part of our commerce ecosystem. Merchant partners create consumption scenarios where a borrower will use an approved credit limit to transact with relevant merchant partners. Given our pricing power, in some cases, we earn revenue based on the difference between our negotiated product cost with the merchant and the price at which we execute a sale with the borrower.

 

As of December 31, 2019, we worked with approximately 56 merchant partners as part of our e-commerce channels on our 9F One Mall. Offline, we select commercial banks to offer virtual credit solutions and cooperate with offline merchant partners such as education institutions, elective medical care institutions and home improvement service providers to provide non-revolving loan products in key consumption verticals. In addition, we provide our advanced technology to our merchant partners through a SaaS offering, helping to optimize their business processes across customer acquisition, marketing, product design and development, risk management and transaction processing.

 

Our Other Partners

 

We benefit from our cooperation with strategic partners to acquire investors, and benefit from our cooperation with merchant partners to acquire borrowers. We also cooperate with partners to jointly provide services to institutional funding partners in areas such as credit risk management.

 

Risk Management

 

We operate a robust risk management platform for our Online Lending Information Intermediary Services extending across credit assessment, broad partner collaboration, efficient and compliant collection and arbitration process, and effective investor protection. Our risk management mission is to provide best-in-class credit assessment, fraud evaluation and product review, all within a streamlined, transparent and compliant workflow process. Under our direct lending program, our institutional funding partners who need to complete their own internal risk assessment and loan approval procedures, also benefit from our strong risk management capabilities because we direct qualified borrowers to institutional funding partners after we conduct initial credit assessment on these borrowers, and also provide services after loan origination such as repayment facilitation and loan collection. Financing guarantee companies provide guarantee protection to institutional funding partners. See “—Users and Partners—Financial Institution Partners.”

 

Our Proprietary Credit Assessment Process

 

Data Collection

 

The foundation of our credit assessment process is data. This includes data accumulated since our inception and data provided by the prospective borrower through the loan application. In addition, we also utilize the credit data from external sources to verify the borrowers’ information in compliance with industry practice.

 

Since our inception, we have built a comprehensive database of borrower profiles which we can use to evaluate individual loan applicants as well as identify fundamental credit trends that are broadly instructive to our underwriting process. We collect credit data from diversified external sources, such as government authorities and third-party data partners, as well as from our own aggregated data including actual credit performance of our existing borrowers. The typical information we collect from borrowers includes age, education level, marital status, occupation, credit history, and bank transaction history.

 

78


Table of Contents

 

We make every effort to ensure the accuracy and reliability of the data we collect, as well as safeguard the privacy of such data. For example, we collaborate with third parties to verify the applicant’s identity by confirming his or her name, ID number and mobile number to ensure data integrity. We also cross examine data we collect from different outside source to verify the transaction history data. The data we collect for each loan applicant will be utilized in our credit assessment process. See “—Risk Management—Our Proprietary Credit Assessment Process—Comprehensive Analysis Across Six Dimensions.”

 

We combat fraud through proprietary advanced analytical methods, based on the information we collect, as well as working with our third-party data partners to access centralized databases of confirmed fraud cases, which serves as a critical and highly effective cross check of our own analyses. In addition, to effectively combat against fraudulent activities, we collect and analyze a borrower’s behavior data, social network and other data with his or her permission. We use artificial intelligence technology to detect various fraudulent patterns in real time.

 

The process of transforming unstructured and disparate data sets into structured datasets of useful features is technology intensive and integrates elements of artificial intelligence and machine learning. We broadly apply artificial intelligence and machine learning across credit risk assessment, fraud detection and process optimization, including data collection and feature engineering. The final output is a credit assessment, based on predictive credit performance, integrating six dimensions of a user’s credit profile with over 1,000 features.

 

Proprietary Credit Scoring and Risk Pricing Models

 

For our Online Lending Information Intermediary Services, our credit decisions are driven by a series of proprietary credit scoring models, collectively known as the Insight-Credit Score Model, which we believe represents one of our key competitive advantages. Our Insight-Credit Score model evaluates a potential borrower across six dimensions, leveraging hundreds of independent variables and 15 sub-models. The real-time nature of our modeling capabilities allows us to render a credit decision in seconds. Our Rainbow Rating system then translates the Insight-Credit Score into tiered credit approvals and pricing.

 

Comprehensive Analysis across Six Dimensions

 

The Insight-Credit Score Model evaluates underwriting variables, which we have found to be statistically significant, across six dimensions: applicant’s demographics, internal credit history, external credit history, repayment capacity, social network, and online merchandise transaction history. These six dimensions allow us to evaluate both a borrower’s willingness and ability to repay the loan on time.

 

Translating Credit Assessment into Pricing

 

Our Insight-Credit Score model makes an assessment of the credit delinquency risk of a prospective borrower in the form of a proprietary credit score called Insight-Credit Score. Our Rainbow Rating system, launched in March 2017, then translates the Insight-Credit Score into tiered credit approvals and pricing. Specifically, the Rainbow Rating divides eligible borrowers into seven grades represented by corresponding colors, namely red (lowest assessed delinquency risk), orange, yellow, green, blue, indigo and violet (highest assessed delinquency risk).

 

Loan applications by prospective borrowers classified as violet will usually be declined, while prospective borrowers falling under other credit rating grades will be considered and usually be assigned an approved credit limit and borrowing cost. The Rainbow Rating will be generated each time a borrower applies to draw down a loan, including a drawdown applied for by a repeat borrower for revolving loan products within his or her approved credit limit. For such repeat borrower, we consider his or her observed account behavior such as repayment history when we assign a Rainbow Rating.

 

79


Table of Contents

 

Our Insight-Credit Score Model is developed and maintained by a dedicated team of more than 50 engineers and data scientists. Through real-time performance monitoring, we constantly evaluate the effectiveness of the variables we use to drive our models, while also searching to identify new variables and relationships to help render credit assessments.

 

Fraud Detection empowered by Artificial Intelligence

 

We combat fraud through a combination of data-driven technologies and analytical methods. At our inception our initial fraud assessments were largely based on known fraud patterns, and served as a foundation to build the comprehensive infrastructure we employ today:

 

·                  Social Network:  We are able to efficiently identify fraud schemes and criminal organizations by evaluating a prospective borrower’s publicly observable social network information.

 

·                  Pattern Recognition:  Largely through machine learning, we have trained our models to identify data anomalies and patterns indicative of fraud. For instance, we can match the circumstances of a fraud application with previously observed fraud schemes.

 

If the information provided by a prospective borrower combined with the outputs from our model is insufficient to automatically render a decision on fraud risk, the loan application will be subjected to manual review.

 

Collection and Arbitration

 

We have developed a systematic process to manage loans in delinquency. When a loan becomes past due for over one day, the loan enters our collection process. For the first 90-day collection period, the loan is managed by both of us and third-party collection companies. If a loan remains overdue after the 90-day period, we typically outsource loan collection to third-party collection companies. Collection tactics include text message reminders, phone calls and legal letters and are utilized intermittently on a case-by-case basis.

 

In addition, disputes arising from, and in relation to the loans facilitated under our Online Lending Information Intermediary Services may be submitted online to arbitration commissions. Such arbitration mechanism provides an efficient and private solution to manage the collection of delinquent loans.

 

Investor Protection Mechanism

 

Prior to August 2016, we offered investors protection service in the form of a quality assurance fund, whereby we charged borrowers quality assurance fund at a floating rate of the loan principal and deposited the quality assurance fund in our custodian bank account. In addition, if the loan repayment proceeds we received from the borrowers were higher than the expected return of the investors, the higher portion would be deposited in our custodian bank account in the form of quality assurance fund. If a loan became pass due for a certain period, we would use the quality assurance fund deposited in the custodian bank account to repay the loan principal and accrued interest to the affected investor. According to our agreements with investors, our contractual obligation for repayment of default loans was limited to the amount of quality assurance fund balance deposited in our custodian bank account.

 

In August 2016, we began to replace the former quality assurance model with an investors’ protection plan featured third-party insurance and guarantee protection mechanism. We gradually transferred the entire historical balance of the quality assurance fund from our own custodian bank account to the depository account, which was set up by Nanfeng Guarantee and supervised by China Taiping. Under this investors’ protection plan, a portion of borrowers were required to pay both money contributions to the depositary account and insurance premium to China Taiping. If a loan became past due for a certain period, Nanfeng Guarantee would use the cash available in the depository account to repay the investors up to the total amount of principal and accrued interest. If the total amount of the money in the depository account was not sufficient for full repayment to the investors, China Taiping will protect the investors up to the amount representing a certain percentage of the insurance premiums paid by the borrowers. Borrowers not participating in the Taiping insurance program were required to pay money contributions to the depository account, which was set up by Nanfeng Guarantee and supervised by China Taiping. If a loan became past due for a certain period, Nanfeng Guarantee would use the cash available in the depository account to repay the investors up to the total amount of principal and accrued interest until the depletion of the cash available in the depository account.

 

80


Table of Contents

 

In September 2017, we began gradually replacing the previous investors’ protection plan with an enhanced investors’ protection plan. Under this enhanced investor protection plan, at the inception of the majority of loans with terms of no more than 12 months, we would require the borrower to pay the insurance premium to China Taiping. If a loan became past due for a certain period, China Taiping would protect investors up to the full amount of principal and accrued interest. All borrowers with loan terms of over 12 months, and all borrowers with loan terms of no more than 12 months but not participating in our Taiping insurance program, were required to make money contributions to the depository account, which was set up by Nanfeng Guarantee and supervised by China Taiping. If a loan became past due for a certain period, Nanfeng Guarantee would use the cash available in the depository account to repay the affected investor up to the total amount of principal and the accrued interest until the depletion of the cash available in the depository account.

 

In January 2018, we announced further upgrades to the enhanced investors’ protection plan. Under the upgraded investors’ protection plan, at the inception of the majority of loans with terms of no more than 12 months, we required the borrower to pay insurance premium to either China Taiping or PICC. If a loan became past due for a certain period, China Taiping or PICC would protect investors up to the full amount of the principal and accrued interest. The loans under China Taiping’s insurance protection obligation were all due by August 15, 2019; however, China Taiping’s insurance protection obligation has not been completely fulfilled as of the date of this annual report due to the ongoing insurance claim and settlement process. PICC provided insurance protection to all the new loans with terms of no more than 12 months that had been originated since May 2018 and covered by the insurance protection plan.  For the remainder of the loans with terms of no more than 12 months, we required the borrowers to pay money contributions to the depository account, which was set up by Guangdong Success, an independent third party. If a loan became past due for a certain period, Guangdong Success would use the cash available in the depository account to repay the investors up to the total amount of principal and the accrued interests until the depletion of the cash available in the depository account. For loans with terms of over 12 months, we required the borrower to pay money contributions to the depository account, and pay guarantee fee to Guangdong Success for the guarantee services provided. If a loan became past due for a certain period, Guangdong Success would use the cash available in the depository account to repay the total amount of principal and accrued interests of the investors until the depletion of the cash available in the depository account. If the cash available in the depository account was insufficient, Guangdong Success would repay the investors up to five times of the guarantee fee paid by the borrowers. Since November 2019, new loans with terms of no more than 12 months are no longer covered by PICC’s insurance protection plan; however, as of the date of this annual report, PICC continues to fulfill its insurance protection obligations for loans originated before November 2019 that were subject to PICC’s insurance protection plan.  Furthermore, Guangdong Success no longer provides guarantee protection on new loans facilitated after February 2020; however, as of the date of this annual report, Guangdong Success continues to fulfill its obligation for loans facilitated before February 2020 that were subject to Guangdong Success’ guarantee protection plan.

 

Since February 2020, we have begun to collaborate with Zhongtian Guarantee, an independent third party. For all the new loans originated since February 2020, borrowers are required to pay money contributions to the depository account set up by Zhongtian Guarantee. If a loan past due for a certain period, Zhongtian Guarantee will use the cash available in the depository account to repay the investors up to the total amount of principal and the accrued interests until the depletion of the cash available in the depository account.

 

Information Technology and Data Protection

 

Our success is, in part, dependent upon our strong, secure and scalable technological capabilities across data science, artificial intelligence and cloud computing. Principal components of our advanced information technology include:

 

·                  Data science.  Data science is at the heart of our business:

 

81


Table of Contents

 

·                  We have massive data sets. As of December 31, 2019, we have accumulated over 5,549 terabytes of data since our inception and each day, on average, we accumulate an additional 243 gigabytes.

 

·                  Our data mining and user behavior analytical capabilities allow us to build a comprehensive credit profile for each borrower for the purpose of assessing both credit needs and delinquency risk.

 

·                  We leverage advanced analytical methods such as artificial intelligence specifically machine learning around data analysis. Critical applications include fraud detection, optimization of resource allocation and improvement of operational efficiency.

 

·                  Security.  We are committed to maintaining a secure online platform:

 

·                  We carefully protect user information. For any transmission of user information, we use data encryption to ensure confidentiality. We employ data slicing and distribute the storage of a user’s data points across several servers. The encryption of our applications is reinforced to prevent any attempt of de-coding or counterfeiting.

 

·                  We have built a firewall that monitors and controls incoming and outgoing platform traffic and defends against distributed denial-of-service attacks. Once any abnormal activity is detected, our system will immediately notify our IT team while automatically activating our third-party traffic control service to prevent any harm to our platform.

 

·                  We have adopted a series of policies on internal controls over information systems, including physical security measures, such as entry and equipment control, and network access management, such as identification, authentication and remote access control.

 

·                  We conduct periodic reviews of our technology platform, identifying and correcting problems that may undermine our system security.

 

·                  Cloud-based services and computing capabilities.  We employ cloud-based computing for our user-facing systems and services. This ensures our systems can scale with our growth, that we can remain flexible with limited maintenance and that we can customize certain applications where necessary. As of December 31, 2019, we have deployed 2,898 servers with 6,630 terabytes of storage space, supported by an optimized algorithm of border gateway protocol, which enables us to quickly adjust resources to meet fluctuating or unpredictable system demands.

 

·                  Artificial intelligence.  We have invested considerably in the research and development of artificial intelligence. We have established an in-house artificial intelligence institute bringing together more than fifty experts recruited from both leading technology companies and academia. We have commercially applied artificial intelligence technology not only in fraud detection but also in smart customer service and automatic product recommendations. For example, we have successfully deployed customer service robots to answer questions from our users.

 

·                  System stability.  Our system infrastructure is primarily hosted within data centers at two separate locations in Beijing and Hangzhou. We maintain redundancy through a real-time multi-layer data backup system to ensure the reliability of our network. Our platform adopts modular architecture that consists of multiple connected components, each of which can be separately upgraded and replaced without compromising the functionality of other components. This makes our platform both highly reliable and scalable, and prevents potential system failures caused by system error of a single component.

 

·                  Scalability.  With modular architecture, our platform can be easily expanded as data storage requirements and user visits increase. In addition, load balancing technology helps us improve distribution of workloads across multiple computing components, optimizing resource utilization and minimizing response time. Today, we process approximately 12.2 million transactions per day on average, with peak volumes of approximately 72.1 million daily transactions.

 

82


Table of Contents

 

·                  Automation and blockchain technology.  Our credit decision engine is highly automated. We leverage over one thousand attribute-based rules, with real time model sample updates based on automatic pattern recognition. We also analyze multi-dimensional behavioral data which allows us to provide increasingly personalized offerings to our borrowers.

 

In addition to the foregoing technologies we employ to support our highly automated platform, we have taken various measures to ensure uninterrupted operation of our platform. For example, we adopt self-healing technology enabling our system to perceive malfunctions and make necessary adjustments to restore normal operational capacity without human intervention. Also, our system integrates with systems of the multiple data providers who serve as backups for each other. If services provided by one data provider are suspended, our system will shift to the backup sources automatically to ensure no interruption to our operation.

 

We have invested in the commercialization and application of emerging new technologies such as blockchain technology, including payment processing and infrastructure provision. We currently focus on developing technologies such as alliance chain technology.

 

Sales and Marketing

 

We benefit from a large user base and strong brand recognition in China, helping to drive word-of-mouth marketing. As a supplement to word-of-mouth marketing, we also employ advertising campaigns through online marketing channels, including:

 

·                  General online marketing.  Our general online marketing relies mainly on data driven search engine marketing and displaying advertisements on portal websites. In addition, we promote our brand and software through our corporate pages on popular interactive social media platforms.

 

·                  Online video platforms.  We collaborate with a number of major television producers and online video platforms to conduct brand promotion, often targeting where we can match our target demographics with the audiences of television and video audiences.

 

·                  Loyalty program.  We launched a loyalty program in 2018 under which the members can gain access to an enhanced suite of services ranging from premier online wealth management products to product discounts on online shopping platform. We intend to grow our membership base as we scale since we view it as a significant future contributor to traffic and product volumes.

 

·                  User referrals. We acquire users through user referrals by giving certain benefits to existing users if they can successfully invite others to become our active users.

 

·                  Partner referrals.  We acquire certain users through partner referrals.

 

Internationalization

 

We have established operations in Hong Kong and Indonesia and are in the process of expanding investment in Southeast Asia and establish deeper cooperation with local financial institutions where we see meaningful opportunities relating to the export of our advanced and robust technology capabilities. We are expanding our footprint overseas and have acquired businesses and established operations in countries of Southeast Asia covering Indonesia, Thailand, Philippines, Vietnam and Singapore. In particular, starting from 2019, driven by our strategy focusing on technology enablement, we have enhanced our business development in Indonesia, Thailand and Philippines, which allow us to cross sell more products and services and monetize our advanced and robust technology capabilities. Furthermore, in 2019, we established cooperation with the Thailand branch of Commerce International Merchant Bank, a major bank in Southeast Asia with headquarter in Kuala Lumpur, to provide our proprietary risk management technologies in tiered pricing and anti-fraud modeling. We have obtained a few key financial service licenses in Hong Kong, Indonesia, Thailand and Philippines, and we plan to apply for additional licenses that are critical for executing our business strategies. We established a research and development center in Shenzhen during the third quarter of 2019 to build an artificial intelligence and risk management team that is dedicated in streamlining our support for overseas markets, strengthening our risk management capabilities, and developing new and innovative modules and applications for our overall business development.

 

83


Table of Contents

 

Competition

 

The industries we are operating in are competitive and evolving. It provides a new means for borrowers to obtain financing and for investors and institutional funding partners to seek new investment and lending opportunities. With respect to loan products, we compete with market players such as traditional financial institutions, small loan companies, e-commerce driven installment platforms and other independent consumer finance platforms; with respect to online wealth management products, we compete with market players such as internet ecosystem owners providing cash management and quasi fixed income products, online third-party financial brokers and information providers, and marketplace lending platforms. Some of our larger 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 development. Our competitors may also have more extensive borrower or investor bases, greater brand recognition and brand loyalty and broader partner relationships than us. We believe that our ability to compete effectively for borrowers, investors, institutional funding partners and other partners depend on many factors, including the variety of our products and services, user experience on our platform, effectiveness of our risk management, our technological capabilities, the risk-adjusted returns offered to investors, our partnership with third parties, our marketing and selling efforts and the strength and reputation of our brand.

 

Furthermore, as our business grows, we face significant competition for highly skilled personnel, including management, engineers, product managers and risk management personnel. The success of our growth strategies depends in part on our ability to retain existing personnel and add additional highly skilled employees.

 

Intellectual Property

 

We rely on a combination of copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. As of December 31, 2019, we have registered 349 trademarks with the Trademark Office of the PRC National Intellectual Property Administration, or the Trademark Office, 261 software copyrights with the PRC National Copyright Administration, and 227 domain names. Furthermore, we are in the process of applying for trademark registrations in Hong Kong, Indonesia, Thailand, Vietnam and Philippines.

 

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology.

 

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. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry— We may not be able to prevent unauthorized use of our intellectual property and may be subject to intellectual property infringement claims, which could reduce demand for our services, adversely affect our revenues and harm our competitive position.” and “ Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.”

 

Seasonality

 

We may experience seasonality in our business, reflecting seasonal fluctuations in internet usage and traditional personal consumption patterns, as our borrowers may use their borrowing proceeds to finance their personal consumption needs. While our rapid growth has somewhat masked this seasonality, our results of operations could be affected by such seasonality in the future.

 

Regulation

 

This section sets forth a summary of the most significant rules and regulations that affect our business activities in China or our shareholders’ rights to receive dividends and other distributions from us.

 

84


Table of Contents

 

Regulations Related to Our Business Operation in China

 

Regulations Related to Foreign Investment

 

On January 1, 2020, the PRC Foreign Investment Law and the Regulations for Implementation of the PRC Foreign Investment Law, or the Implementation Regulations, came into effect and became the principal laws and regulations governing foreign investment in the PRC, replacing the trio of prior laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations.

 

According to the PRC Foreign Investment Law, “foreign investment” refers to the investment activities conducted directly or indirectly by foreign individuals, enterprises or other entities in the PRC, including the following circumstances: (i) the establishment of foreign-invested enterprises in the PRC by foreign investors solely or jointly with other investors, (ii) a foreign investors’ acquisition of shares, equity interests, property portions or other similar rights and interests of enterprises in the PRC, (iii) investment in new projects in the PRC by foreign investors solely or jointly with other investors, and (iv) investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Pursuant to the PRC Foreign Investment Law, China has adopted a system of national treatment which includes a negative list with respect to foreign investment administration. The negative list will be issued by, amended or released upon approval by the State Council, from time to time. The negative list will consist of a list of industries in which foreign investments are prohibited and a list of industries in which foreign investments are restricted. Foreign investment in prohibited industries is not allowed, while foreign investment in restricted industries must satisfy certain conditions stipulated in the negative list. Foreign investments and domestic investments in industries outside the scope of the prohibited industries and restricted industries stipulated in the negative list will be treated equally. The most recent version of the negative list was issued in 2019.

 

PRC Foreign Investment Law and the Implementation Regulations allow foreign-invested enterprises established prior to January 1, 2020 and having corporate structure and governance inconsistent with the PRC Company Law or the PRC Partnership Enterprise Law, as applicable, to maintain their corporate structure and governance within a five-year transition period, but require adjustment for compliance with the PRC Company Law or the PRC Partnership Enterprise Law, as applicable, shall be completed prior to the expiration of such transition period.

 

Foreign investors and foreign investment enterprise are also required to submit information reporting in accordance with the PRC Foreign Investment Law and the Implementation Regulations and will be imposed legal liabilities for failure to comply with such requirements.

 

Regulations Related to Online Lending Information Intermediary Services

 

Due to the relatively brief history of the online lending information intermediary services in China, the regulatory framework governing the industry has not developed comprehensively. Since mid-2015, the PRC government and relevant regulatory authorities have issued various laws and regulations governing the industry. However, the interpretation and implementation of some of these laws and regulations remain uncertain and may be subject to further detailed guidance to be promulgated by the regulators. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—The laws and regulations governing the industries we operate in in China are developing and evolving and subject to changes, and our operations and products have been and may need to continue to be modified to ensure full compliance with applicable laws and regulations. If any of our business practice is deemed to violate any applicable laws, regulations or requirements of regulatory authorities, our business, financial condition and results of operations may be materially and adversely affected.”

 

On July 18, 2015, ten PRC regulatory agencies, including the PBOC, the MIIT, the CBRC, and other relevant government authorities, promulgated the Internet Finance Guidelines. The Internet Finance Guidelines defines peer-to-peer lending and borrowing, or P2P lending, as direct loans between lenders and borrowers through an online platform, which shall be governed by the Contract Law of the PRC, the General Principles of the Civil Law of the PRC, and related judicial interpretations promulgated by the Supreme People’s Court. The Internet Finance Guidelines specifies that CBRC is responsible for the administration of the P2P lending industry. Pursuant to the Internet Finance Guidelines, online lending information intermediaries shall act as an intermediary to provide information exchange, matching, credit assessment and other intermediary services for P2P lending which occurs directly between individuals. The online lending information intermediaries shall not engage in illegal fund-raising, nor shall they provide any credit enhancement service. The Internet Finance Guidelines also requires the online lending information intermediaries to separate funds of the borrowers and lenders from its own funds and set up custody accounts with banks to hold funds of the borrowers and lenders.

 

85


Table of Contents

 

On April 12, 2016, the General Office of the State Council issued the Circular of the General Office of the State Council on Issuing the Implementation Plan of the Special Rectification of Internet Financial Risks, or the Implementation Plan, which, among other things, sets forth certain principles for online lending information intermediaries, including that they shall not set up capital pools or provide loans, finance for themselves, promise on repayment of principals and interests, or engage in offline marketing. By issuing the Implementation Plan, the General Office of the State Council started to launch a campaign to rectify risks in and to regulate the internet finance industry, including the online lending information service industry. On April 13, 2016, CBRC issued the Circular on Issuing the Implementation Plan of the Special Rectification of P2P Lending Risks, or the P2P Implementation Plan, to further specify certain criteria and principles for the rectification and regulating of online lending information intermediaries.

 

On August 17, 2016, CBRC, MIIT and other relevant government authorities published the Interim Measures, setting out a legal framework for the entire P2P lending industry. The Interim Measures categorizes online lending information intermediaries as financial information intermediary institutions that are engaged in P2P lending information intermediary services and provide borrowers and lenders with information collection, information publication, credit assessment, information exchange, loan facilitation and other intermediary services mainly through the internet.

 

According to the Internet Finance Guidelines and the Interim Measures, intermediaries that provide online lending information services may not engage in certain activities, including, among others, (i) holding investors’ fund or setting up capital pools with investors’ fund, (ii) providing security or guarantee to investors as to the principals and returns of the investment, (iii) issuing or selling any wealth management products, (iv) splitting the terms of any financing project, and (v) promoting its financial products on physical premises. The Interim Measures also require the intermediaries that provide online lending information services to strengthen their risk management, enhance screening and verifying efforts on the borrowers’ and investors’ information, and to set up custody accounts with qualified banks to hold user funds.

 

Any violation of the Interim Measures by an online lending information intermediary may lead to certain penalties as determined by applicable laws and regulations. If the applicable laws and regulations are silent on the penalties, the competent regulators may impose penalties in accordance with the Interim Measures, which include but are not limited to warning, rectification, tainted credit record and fines up to RMB30,000 (US$4,309.2).

 

Our platform, Jiufu Puhui, operated by Jiufu Puhui, a subsidiary of one of our variable interest entities, is engaged in online lending information intermediary services. To comply with existing laws, regulations, rules and governmental policies relating to online lending information intermediary services, we have implemented and will continue to implement various policies and procedures to conduct our business and operations. However, given that detailed regulations and guidance of online lending information intermediary services are yet to be promulgated, we cannot be certain that our existing business practices would not be deemed to violate any existing or future laws, rules, and regulations. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—The laws and regulations governing the industries we operate in in China are developing and evolving and subject to changes, and our operations and products have been and may need to continue to be modified to ensure full compliance with applicable laws and regulations. If any of our business practice is deemed to violate any applicable laws, regulations or requirements of regulatory authorities, our business, financial condition and results of operations may be materially and adversely affected.”

 

Regulations related to private lending and intermediation

 

The Contract Law of the PRC, which became effective in October 1999, or the Contract Law, confirms the validity of loan agreement between natural persons and provides that a loan agreement between natural persons becomes effective when the lender provides a loan to the borrower. The Contract Law also provides that the interest rates charged under the loan agreement between natural persons shall not violate the applicable provisions of the PRC laws and regulations.

 

86


Table of Contents

 

In accordance with the Private Lending Judicial Interpretations, which came into effect on September 1, 2015, private lending refers to the financing activities between and among natural persons, legal persons, or other organizations. The Private Lending Judicial Interpretations provides that agreements between a lender and a borrower on loans with annual interest rates below 24% are generally valid and enforceable unless they fall into certain situations provided under the Contract Law generally affect the validity and enforceability of any kind of contracts, including damaging interests of the state, the community or any third parties, concealing illegal intentions with a lawful form or violating mandatory requirements of PRC laws and administrative regulations. With respect to loans with annual interest rates between 24% and 36%, the general rule of the PRC courts would be to only support interest claims that do not exceed 24%. For interests whose annual rates fall between 24% and 36%, if a borrower has repaid such interests and such repayment does not damage interests of the state and the community or any third party, such borrower’s request to demand return such interest is likely to be denied by PRC courts. If the parties agree on annual interest rates higher than 36%, the agreement to pay interests in excess of 36% on an annual basis is invalid, and the PRC courts will support the borrower’s request to demand return of the portion of interests in excess of 36% even if such interests have been paid to the lender.

 

In addition, on August 4, 2017, the Supreme People’s Court issued the Circular of the Supreme People’s Court on Issuing Several Opinions on Further Strengthening the Judicial Practice Regarding Financial Cases, or Financial Cases Judicial Interpretation, which provides, among others, that (i) if the aggregate amount of interests, compound interests, delinquency interests, liquidated damages and other fees charged by a lender exceeds 24% per annum under a loan agreement, the claim of the borrower to adjust or reduce the part of such aggregate amount in excess of 24% per annum will be supported by the PRC courts; and (ii) circumvention of the maximum interest rates requirements by online lending information intermediaries and lenders through charging intermediary service fees shall be invalid.

 

An intermediation contract is defined by the PRC Contract Law as an agreement whereby the intermediary, in consideration of service fees by its client, refers to its client contract opportunities or provides other services related to contract formations. Pursuant to the PRC Contract Law, an intermediary must provide true information relating to the contract opportunity. If an intermediary conceals any material fact intentionally or provides false information in connection with the contract opportunity, which results in harm to the client’s interests, such intermediary forfeits its service fees and is liable for the damages so incurred by the client. Financial Cases Judicial Interpretation further specifies that the relationship between an online lending information intermediary and each other party of an online lending loan agreement is an intermediary contractual relationship; but if the intermediary service fees charged by an online lending information intermediary are found to be instrumentalities to circumvent the statutory limit of the interest rate, such intermediary service fees will be invalid. Our business of connecting investors and borrowers constitutes an intermediary service, and our contracts with investors and borrowers are intermediation contracts under the PRC Contract Law.

 

Regulations related to filings for online lending information intermediaries

 

Pursuant to the Interim Measures, an online lending information intermediary must make a filing with the competent local financial regulatory authority.

 

On October 28, 2016, CBRC, the SAIC and MIIT jointly released the Record-filing Guidelines, which provides specific implementation rules in relation to the filing and registration requirements set out under the Interim Measures. Pursuant to the Record-filing Guidelines, a newly established online lending information intermediary is required to make a filing with the local financial regulatory authority within ten business days after it obtains a business license, while online lending information intermediaries established and started to conduct business prior to the promulgation of the Record-filing Guidelines shall apply for record-filing after completion of risk rectifications in accordance with relevant arrangement under the P2P Implementation Plan.

 

On December 8, 2017, the National Rectification Office, issued the Circular 57, which provides further clarification on several matters regarding the rectification and record-filing of online lending information intermediaries. Circular 57 requires certain local governmental authorities to establish an inspection team to conduct risk rectification inspections on online lending information intermediaries within their jurisdictions. Circular 57 also sets forth certain requirements which an online lending information intermediary shall not be in violation of relevant rules before it can qualify for the record-filing, including: (i) an online lending information intermediary may not conduct the “thirteen prohibited actions” or exceed the maximum balance of borrowed funds provided under the Interim Measures after August 24, 2016, and shall gradually reduce the balance not in compliance with such requirement before the record-filing (see “—Regulations related to business operations”); (ii) an online lending information intermediary which has participated in businesses of down payment loans for real estate purchasing, campus loans or cash loans, is required to suspend facilitation of new loans of such kind and gradually reduce outstanding balance of the abovementioned loans within a certain timetable as required under the Circular 141, and the Notice on Further Strengthening the Regulation and Management Work of Campus Online Lending Business issued in May 2017 by CBRC, the General Office of the Ministry of Education and Ministry of Human Resources and Social Security (see “—Regulations related to cash loans”); and (iii) the online lending information intermediaries are required to set up custody accounts with qualified banks that have passed certain testing and evaluation procedures run by the National Rectification Office to hold customer funds (see “—Regulations related to fund custodian”). Pursuant to Circular 57, if an online lending information intermediary passes the inspection, the local governmental authorities shall complete its record-filling. For an intermediary that fails the inspection, it will be required to transfer its online lending information intermediary business to other intermediaries, or to terminate the business and exit the markets gradually, or be banned from the business pursuant to relevant laws and regulations, depending on the reasons for its failure to pass the inspection.

 

87


Table of Contents

 

On August 13, 2018, the National Rectification Office issued the Compliance Inspection Notice, which requires the online lending information intermediaries to be inspected in accordance with the requirements provided in the Interim Measures, the Custodian Guidelines and the Information Disclosure Guidelines, and in combination the Compliance Inspection Checklist. The Compliance Inspection Notice emphasizes that the compliance inspection will focus on the following issues: (i) whether the intermediary conducts business only as an information intermediary and whether it is engaged in any credit intermediary business; (ii) whether the intermediary maintains any capital pool and has advanced funds for the clients; (iii) whether the intermediary finances itself directly or in a disguised form; (iv) whether the intermediary provides the lenders with guarantees or promises to repay principals and interests thereon directly or in a disguised form; (v) whether the intermediary provides rigid payment for the lenders; (vi) whether the intermediary conducts risk assessments for the lenders and provide hierarchical management of lenders; (vii) whether the intermediary fully discloses risk related information of the borrowers to the lenders; (viii) whether the intermediary adheres to the online lending principle of small amount and dispersion; (ix) whether the intermediary raises funds by sale of wealth management products through itself or its affiliates; (x) whether the intermediary solicits lenders by high interests and other manners. The compliance inspection shall be carried at three levels as follows: (i) the self-inspection carried out by the online lending information intermediary itself, which is required to submit to the provincial online lending rectification office a self-examination report and an authenticity commitment letter signed by its senior management and major shareholders; (ii) the self-discipline inspection carried out by a local internet finance association or competent intermediary and/or the National Internet Finance Association of China, which are required to submit to the provincial online lending rectification office a self-discipline inspection report and an authenticity commitment letter signed by the inspectors and the principal of such association; and (iii) the administrative verification carried out by the provincial online lending rectification office on the basis of the self-inspection and self-discipline inspection abovementioned. The provincial online lending rectification offices are required to verify the authenticity of the content and data of the self-examination reports and the self-discipline inspection reports and submit a conclusion report to the National Rectification Office. If a self-examination report or self-discipline inspection report is found to contain false information, the online lending information intermediary involved will be vetoed. The compliance inspection shall be completed by the end of December 2018. The online lending information intermediaries that generally meet the requirement of being an intermediary and various standards will be allowed to link to the information disclosure and products registration system. After a period of operation and inspection, the online lending information intermediaries that meet relevant requirements can apply for record-filing.

 

In addition, Beijing Rectification Office issued the Notice on Launch of the Self-inspection of the Online Lending Information Intermediaries Registered in Beijing on August 24, 2018, which requires that an online lending information intermediary registered in Beijing shall submit a self-inspection report by September 30, 2018 and in any event no later than October 15, 2018. The Beijing Internet Finance Association issued the Announcement on Launch of the Self-discipline Inspection of the Online Lending Information Intermediaries Registered in Beijing on August 27, 2018, which provides that the self-discipline inspection by it shall commence on September 10, 2018 and be completed by November 30, 2018. On December 19, 2018, the Leading Group Office of the Internet Financial Risk Rectification Campaign and the National Rectification Office jointly promulgated the Notice on the Classification and Disposal of Online Lending Institutions and Risk Prevention, which provides that online lending information intermediaries shall be classified into the following two categories according to their risk profiles: (i) institutions with exposed risks, and (ii) institutions without exposed risks, which are further classified as non-operating institutions, small-scale institutions, high-risk institutions and normal operating institutions. With respect to the normal operating institutions, the relevant governmental authorities shall require the institutions to strictly limit balance of loans and number of lenders and shall assess the risk profiles of such institutions regularly and adjust their classifications in a timely manner if necessary. Furthermore, Beijing Rectification Office issued a Notice on January 24, 2019 requiring online lending information intermediaries to continue to reduce its business scale and number of borrowers and lenders during the administrative verification period.

 

88


Table of Contents

 

The Interim Measures also requires online lending information intermediary to apply for appropriate telecommunication business license after it completes the record-filing with the local financial regulatory authority and to specify “online lending information intermediary” or similar terms in its business scope listed in its business license. See “—Regulations Related to our Business Operation in China—Regulations Related to Value-added Telecommunication Services.”

 

We submitted the self-examination report on September 27, 2018. As of the date of this annual report, we have not received any comments from Beijing Rectification Office on our self-examination report. The National Internet Finance Association of China has commenced the self-discipline inspection on us since October 2018, the Beijing Internet Finance Association has commenced the self-discipline inspection on us since November 2018, and as of the date of this annual report, we have not received any comments from the National Internet Finance Association of China or the Beijing Internet Finance Association. In May 2019, we were inspected by the Office of Finance of Fangshan District of Beijing, a competent authority under Beijing Rectification Office, and were allowed to link to information disclosure and products registration system. As of the date of this annual report, we have not received any comments from the Office of Finance of Fangshan District of Beijing. In addition, in November 2019, the Leading Group Office of the Internet Financial Risk Rectification Campaign and the National Rectification Office jointly promulgated the Circular 83, which provides that the local government may, in combination with the compliance inspection, guide certain qualified online lending information intermediaries to resolve the outstanding business risk through transformation to micro-lending companies on a voluntary basis. Circular 83 provides a means for online lending information intermediaries to proactively handle and resolve the risks of its existing business in addition to the record-filings of online lending information intermediaries. As of the date of this annual report, we do not expect to make substantive adjustment to our business model and operations towards to micro-lending business. There can be no assurance that we will be able to receive final clearance on our self-examination report, pass the inspections and verifications conducted or to be conducted by internet finance associations, the Beijing Rectification Office and its competent authorities, submit the application for record-filing and complete the record-filing. See “ Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—The laws and regulations governing the industries we are operating in in China are developing and evolving and subject to changes, and our operations and products have been and may need to continue to be modified to ensure full compliance with the laws and regulations governing the industries we are operating in China. If any of our business practice is deemed to violate any applicable laws, regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected.”

 

Regulations related to business operations

 

Pursuant to the Interim Measures, an online lending information intermediary shall not, by itself or on behalf of a third party, engage in “thirteen prohibited actions,” including (i) financing for itself directly or in a disguised form, (ii) accepting, collecting or gathering funds of lenders directly or indirectly, (iii) providing lenders with guarantee or promise on repayment of principals and interests directly or in a disguised form, (iv) publicizing or promoting financing projects on physical premises other than digital channels as the internet, fixed-line telephone or mobile phone by themselves or authorizing any third party to conduct such activities; (v) providing loans, unless otherwise permitted by laws and regulations; (vi) splitting the term of any financing project; (vii) raising funds by issuing wealth management products and other financial products on their own, or selling bank wealth management products, assets management by securities companies, funds, insurance, trust products or other financial products on a commission basis; (viii) carrying out business similar to asset-backed securities or conducting the transfer of creditor’s rights in the form of packaged assets, asset-backed securities, trust assets, and fund shares; (ix) mixing or bundling its business with or providing agency services for other institutional investment, sale as agency and brokerage business, unless otherwise permitted by relevant laws and regulations; (x) making up or exaggerating the authenticity of financing projects and the prospect of profits, concealing defects and risks in financing projects, making false advertising or promotion by using ambiguous words or other fraudulent means, fabricating or spreading false or incomplete information to damage others’ business reputation, or misleading lenders or borrowers; (xi) providing information intermediary services for those highly risky financing projects which use borrowed funds to invest in stocks, over-the-counter financing, futures contracts, structured products and other derivatives; (xii) engaging in equity-based crowd funding; and (xiii) other activities prohibited by the laws, regulations and the regulatory provisions on P2P lending.

 

89


Table of Contents

 

Furthermore, the Interim Measures requires online lending information intermediaries to set up limits on the balance of funds that a borrower may borrow from a single online lending information intermediary platform and from all platforms, based on their risk management capabilities. The limits for any natural person and any entity on a single platform shall not exceed RMB200,000 and RMB1,000,000, respectively, and the limit for any natural person and any entity on all platforms shall not exceed RMB1,000,000 and RMB5,000,000, respectively.

 

In addition, the Interim Measures also sets out certain additional requirements applicable to online lending information intermediaries, including real-name registration of lenders and borrowers, fund raising period, internet and information security, file management, and protection of lenders and borrowers.

 

Circular 57 issued on December 8, 2017 further prohibits online lending information intermediaries from setting up new risk reserve funds or increasing existing risk reserve funds, and requires them to gradually reduce the existing risk reserve funds. Besides, the Circular 57 permits lenders’ rights to loans to be transferred between lenders for liquidity purpose on a low frequency basis. But it expressly prohibits certain transfers. For example, transfer of lenders’ rights in forms of assets-backed securities, trust assets, fund properties and certain other forms of securities is prohibited. For another instance, a lender is prohibited from transferring fixed-term financial products provided by online lending information intermediaries, if such transfer results from the mismatch between the fixed term of such products and the term of the loan to the borrower. Circular 57 also prohibits online lending information intermediaries from facilitating lenders to borrow on their platforms by using their lenders’ rights to loans as pledge or mortgage. The Compliance Inspection Checklist also prohibits online lending information intermediaries from providing fixed-term financial products, including promising that the funds can be withdrawn at any time, or providing for the lenders’ exit through transfer of creditor’s rights in the contracts, except for products under which investment commitment periods have been specified in the products’ names, and lenders have been fully reminded of the liquidity risk and confirm in writing in advance.

 

In October 2016, six PRC regulatory agencies, including CBRC and the Ministry of Education, or MOE, jointly issued the Notice on Further Strengthening the Rectification of Campus Online Lending, which prohibits online lending information intermediaries from providing online lending information services to college students under the age of eighteen and sets forth certain restrictions on providing online lending information services to college students above the age of eighteen. In May 2017, CBRC, MOE and the Ministry of Human Resources and Social Security issued the Notice on Further Strengthening the Regulation and Management Work of Campus Online Lending Business, or the Circular 26, which suspends online lending information intermediaries from providing online lending information services to any college student and requires the outstanding balance of such campus loans to be gradually reduced until reaching a zero balance.

 

Regulations related to fund custodian

 

The Interim Measures requires an online lending information intermediary to carry out isolated management of its proprietary funds and the funds of lenders and borrowers and choose qualified banking financial institutions as the custodian institutions for the funds of lenders and borrowers. Pursuant to the Interim Measures, the custodian institutions shall enter into fund custodian agreements with the online lending information intermediary, the borrowers, the lenders and/or other related parties, and conduct custodian, transfer, payment, accounting and supervision of the funds of lenders and borrowers pursuant to such agreements. On February 22, 2017, CBRC released the Custodian Guidelines, which further requires that only commercial bank may act as the custodian institution for P2P lending business and an online lending information intermediary shall only designate one single commercial bank to provide the custodian services. Circular 57 further requires that the commercial banks designated by online lending information intermediaries should have passed certain testing and evaluation procedures run by the National Rectification Office. Pursuant to the Custodian Guidelines, the custodian institutions are not allowed to provide any security or guarantee for P2P lending transactions and the online lending information intermediaries are not allowed to use the custodian institutions to advertise their services except for compliance with disclosure and regulatory requirements. The Custodian Guidelines also sets forth other business standards and requirements for custodian institutions and online lending information intermediaries to comply with. Custodian institutions and online lending information intermediaries conducting the online custodian services prior to the effectiveness of the Custodian Guidelines have a six-month grace period to rectify any activities not in compliance with the Custodian Guidelines. In September 2019, the Leading Group Office of the Internet Financial Risk Rectification Campaign and the National Rectification Office jointly and successively promulgated the Notice on Strengthening the Construction of Credit System in the Field of P2P Online Lending, which provides that online lending information intermediaries shall be incorporated into and connected to the credit system, and the Notice on Further Strengthening the Online Lending Funds Custodian, which provides that commercial banks that have passed certain testing and evaluation procedures shall report to the National Internet Finance Association of China in a timely manner when certain major events related to the custodian of online lending funds occur, such as, material changes to the custodian system of online lending funds, the entry or exit of any online lending information intermediary, and suspension of the special account for the custodian of online lending funds by competent authorities, and the National Internet Finance Association of China shall report to the National Rectification Office in a timely or regular manner as appropriate.

 

90


Table of Contents

 

We have entered into an agreement with China Huaxia Bank Beijing Branch, under which the Huaxia Bank provides custodian services for funds of borrowers and investors on our online lending information intermediary platform Jiufu Puhui.

 

Regulations related to information disclosure

 

The Interim Measures stipulates certain requirements on the information disclosure by online lending information intermediaries, which include, among other things: (i) full disclosure to investors of the basic information of borrowers and financing projects, the risk assessment results and potential risk of the projects, the use of funds, and other related information on their official websites, subject to applicable requirements on state secrets, business secrets and privacy; and (ii) disclosure of certain required regular announcements on their official websites, submission of the regular information disclosure announcements and other relevant documents to the local financial regulatory authority for records, and preservation of such documents at the intermediary’s domicile for inspection by the public. Pursuant to the Interim Measures, detailed rules on the information disclosure by an online lending information intermediary shall be formulated separately. On August 23, 2017, CBRC released the Information Disclosure Guidelines, to further regulate the information disclosure. Consistent with the Interim Measures, the Information Disclosure Guidelines emphasizes the requirement of information disclosure by an online lending information intermediary and further details the frequency and scope of such information disclosure. Pursuant to the Information Disclosure Guidelines, online lending information intermediaries are required to disclose certain information through their own official websites and other internet channels such as mobile apps, WeChat official account and microblog. The information required to be disclosed to the public includes, among others, (i) the basic information of the online lending information intermediary, such as its record-filing information, organizational information, and examination information, (ii) the information relating to the transactions facilitated by the online lending information intermediaries, such as the number of transactions and the sum of loan amount facilitated by the online lending information intermediary as accumulated since its establishment, the number of the loans to be repaid, the sum of the outstanding amount and the number of overdue loans and the unpaid sum, which is required to be updated on a monthly basis, and (iii) the information relating to the material changes of the online lending information intermediaries. Other than the information required to be disclosed to the public, it is further required under the Information Disclosure Guidelines that the online lending information intermediaries shall disclose the information relating to the borrowing requests to the lenders, which includes: (i) the basic information of the borrower; (ii) the basic information of the project; (iii) the risk assessment of the project and potential results; and (iv) the information relating to the loans that are not fully repaid. Online lending information intermediaries that have been carrying out the online lending information intermediary business prior to the effectiveness of the Information Disclosure Guidelines have a six-month grace period to rectify their non-compliance matters in accordance with the Information Disclosure Guidelines.

 

91


Table of Contents

 

Regulations related to cash loans

 

In April 2017, the National Rectification Office issued the Notice on Cash Loan. The Notice on Cash Loan requires the local branches of the National Rectification Office to conduct a comprehensive review and inspection of the cash loan business of online lending platforms and requires such platforms to implement necessary improvements and remediation within a specific period to comply with the relevant requirements under the applicable laws and regulations. The Notice on Cash Loan focuses on preventing malicious fraudulent activities, loans that are offered at excessive interest rates and violence in the loan collection processes in the cash loan business operation of online lending platforms. The National Rectification Office also issued a list of cash loan business activities that were to be examined.

 

On December 1, 2017, the Leading Group Office of the Internet Financial Risk Rectification Campaign and the National Rectification Office jointly issued Circular 141, which, among other things, sets out a series of requirements and restrictions in connection with cash loan business and other business participated in by online lending information intermediaries. Circular 141 specifies the features of cash loans as not based on consumption scenarios and unsecured, with no specified use of loan proceeds and no qualification requirement on customers, etc.

 

Pursuant to Circular 141, online lending information intermediaries are prohibited from (i) conducting the lending business without obtaining approvals for the lending business; (ii) facilitating any loan the overall financing costs (including up-front interests, commissions, management fees, deposits from principal disbursements and delinquency interest rates) of which exceed the 24%/36% interest ceiling provided under the Private Lending Judicial Interpretations (see “—Regulations related to private lending and intermediation”); (iii) outsourcing core functions such as data collection, customer identification, credit assessment or account openings; (iv) enabling banking financial institutions to engage in P2P lending; (v) providing loan facilitation services to students or individuals who do not possess sufficient debt service capabilities; (vi) conducting real-estate financing such as down payment loans for real estate purchasing; (vii) facilitating loans without clear and specified purposes; or (viii) collecting debts by using violence, threats, humiliation, defamation or harassment. Circular 141 also requires institutions, including online lending information intermediaries, (i) to follow the “know-your-customer” principle and prudentially assess and determine the borrowers’ eligibility, credit limit and cooling-off period, etc.; and (ii) to enhance the internal risk control and protection of customer information and prudentially use the “data-driven” risk management model. Institutions violating the above rules will be ordered to suspend its business, be prohibited from the record-filing, be subject to license revocation, or be subject to other administrative penalties.

 

In addition, Circular 141 also imposes several requirements on banking financial institutions engaged in the “cash loan” business, including, among other things, (i) such banking financial institutions shall not extend loans jointly with any third-party institution which has not obtained approvals for the lending business, or fund such institution for the purpose of extending loans in any form; (ii) with respect to the loan business conducted in cooperation with third-party institutions, such banking financial institutions shall not outsource the core business (including the credit assessment and risk control), and shall not accept any credit enhancement service whether or not in a disguised form (including the commitment to taking delinquency risks) provided by any third-party institutions with no guarantee qualification and (iii) such banking financial institutions must require and ensure that the third-party institutions shall not collect any interests or fees from the borrowers.

 

Regulations related to illegal fund raising

 

Funds raising from the general public shall be conducted in strict compliance with applicable PRC laws and regulations and shall obtain required approvals to avoid administrative and criminal liabilities. The Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business Activities promulgated by the State Council on July 13, 1998 and amended on August 1, 2011, and the Notice on Relevant Issues Concerning the Penalty on Illegal Fund Raising issued by the General Office of the State Council on July 25, 2007, explicitly prohibit illegal fund raising. Pursuant to the Interpretations of the Supreme People’s Court on Several Issues Concerning Specific Application of Law with Respect to the Trial of Illegal Fund Raising Criminal Cases which became effective on January 4, 2011, or the Illegal Fund Raising Judicial Interpretations, fund raising from the public, including natural persons and entities, will constitute a criminal offense of “illegally soliciting deposits from the public or illegally soliciting deposits from the public in a disguised manner” under the PRC Criminal Law, if all the following four criteria are met: (i) the fund raising is not approved by the relevant authorities or is conducted under the guise of legitimate business operations; (ii) the fund raising is promoted to the public via social media, promotion fairs, leaflets, short messaging services and etc.; (iii) the fund-raiser promises to repay the principals and interests accrued thereon, or to pay investment returns, in cash, properties in kind, equity and other forms within certain period; and (iv) the fund-raising targets at the general public as opposed to specific natural persons or entities. The Illegal Fund-Raising Judicial Interpretations also provides criteria of other forms of illegal fund raising.

 

92


Table of Contents

 

Illegal fund-raising activities by natural persons or entities will be subject to administrative penalties, including fines and confiscation of illegal revenues, as well as criminal liabilities. Pursuant to the Illegal Fund Raising Judicial Interpretations, an offender that is an entity will be subject to criminal liabilities, if it illegally solicits deposits from the public or illegally solicits deposits in a disguised form (i) in an amount exceeding RMB1,000,000, (ii) from over 150 persons, including natural persons and entities, or (iii) causing fund raising targets direct economic losses of more than RMB500,000, or (iv) causing material adverse effects on the public or leading to other severe consequences. An offender who is a natural person is also subject to criminal liabilities but with lower thresholds.

 

For our Online Lending Information Intermediary Services, we serve as an intermediary between investors and borrowers and do not involve as a party to any loan facilitated through our platform. We have taken measures to avoid conducting any activities that are prohibited by the illegal-fundraising related laws and regulations. Except for the service fees that we charge the investors, we do not directly receive any funds from investors in our own accounts and funds from investors are deposited into and settled by a third-party custodian account managed by China Huaxia Bank. To date, we have not been subject to any fines or other penalties under any PRC laws and regulations that prohibit illegal fundraising. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—The origination of loans on our platform could give rise to liabilities under PRC laws and regulations that prohibit illegal fundraising and unauthorized public offerings.”

 

Regulations Related to Insurance Brokerage and Internet Insurance

 

The primary regulation governing the insurance intermediaries is the Insurance Law of the PRC, or the Insurance Law, as amended on April 24, 2015. According to the Insurance Law, the China Insurance Regulatory Commission (currently known as the China Banking and Insurance Regulatory Commission), or the CIRC, is the regulatory authority responsible for the supervision and administration of the PRC insurance companies and the intermediaries in the insurance sector, including insurance agencies and brokers.

 

On February 1, 2018, the CIRC promulgated the Provisions on the Regulation of Insurance Brokers, which became effective on May 1, 2018 and replaced the Provisions on the Supervision and Administration of Insurance Brokerages promulgated by the CIRC in September 2009 and amended in October 2015. “Insurance brokers,” as defined by the Provision on the Regulation of Insurance Brokers, cover such institutions (including insurance brokerage companies and their branches) that tender intermediary services to insurance policyholders in consideration of commissions in the process of insurance contract formation with insurance companies. Pursuant to the Provisions on the Regulation of Insurance Brokers, the establishment and operation of an insurance broker must meet the qualification requirements specified by the CIRC, obtain approval from the CIRC and be licensed by the CIRC. Specifically, the paid-in registered capital of a cross-province insurance brokerage company at least must be RMB50 million and that for an intra-province insurance brokerage company (the one only operates within the province in which it is registered) at least must be RMB10 million.

 

In addition, as an operation requirement, an insurance broker has to register the practice of its insurance brokerage practitioners as required. An “insurance brokerage practitioner” is defined by the Provisions on the Regulation of Insurance Brokers as such person within an insurance broker (i) who is to draft insurance plans for policyholders or the insured, to handle the insurance procedures and to assist in the claims for compensation, or (ii) who is to provide the clients with consultation services regarding disaster and loss prevention, risk assessment and risk management, and to engage in reinsurance brokerage and other business.

 

According to the administrative guidelines published by the CIRC on its official website and other relevant PRC regulations, a foreign investor must satisfy the following requirements before it can invest in the insurance brokerage industry: (i) it should be a foreign insurance broker with more than thirty years of experience in operation of commercial institutions within the territories of World Trade Organization members; and (ii)  its total assets shall be no less than US$200 million as of the end of the year prior to its application.

 

93


Table of Contents

 

In July 2015, the CIRC issued the Interim Measures for the Regulation of Internet Insurance Business, or the Internet Insurance Interim Measures, pursuant to which no institutions or individuals other than insurance institutions (namely, insurance companies, insurance agency companies, insurance brokerage companies and other qualified insurance intermediaries) may engage in the internet insurance business. Under the Internet Insurance Interim Measures, insurance institutions are allowed to conduct internet insurance business through both self-operated online platforms and third-party online platforms. Self-operated online platforms refer to online platforms set up by insurance institutions. Third-party online platforms refer to online platforms providing network supporting services for internet insurance business activities of insurance consumers and insurance institutions. Both self-operated online platforms and third-party online platforms are required to meet certain conditions and are subject to certain requirements. For example, both platforms must obtain relevant value-added telecommunication licenses or complete internet content provider filings, as applicable, and have network access within the territory of the PRC; and insurance institutions are prohibited from cooperating with third-party online platforms that do not meet those conditions. Both types of online platforms shall accurately disclose the information of insurance products required by laws and regulations, and shall not make any false representations, exaggerate previous achievements, illegally promise earnings or undertake to bear losses, or provide other misleading descriptions. In addition, several rules exist especially for third-party online platforms. For example, third-party online platforms which are not insurance institutions are only allowed to provide network supporting services, and shall not provide any internet insurance business such as underwriting, settlement of claims, and cancellation of insurance, complaints and customer services. Also, third-party online platforms are not allowed to collect premiums on behalf of the insurance institutions; the premiums paid by insurance customers are required to be directly transferred to the special account designated for the premium income of the insurance institutions.

 

Jiuxing Insurance Brokerage Co., Ltd. (formerly known as Ruifeng Insurance Brokerage Co., Ltd.), or Jiuxing Insurance, which is a subsidiary of our variable interest entities, holds a license to conduct insurance brokerage business. Jiuxing Insurance started to sell onshore insurance products in the fourth quarter of 2019 and suspended the sales due to our business adjustment in 2020.

 

Regulations Related to Commercial Factoring

 

The commercial factoring is a relatively new business model in China, the MOFCOM had issued circulars to promote commercial factoring in the specific regions. Pursuant to the Circular on the Pilot Work of Commercial Factoring, which was promulgated by the MOFCOM on June 27, 2012, a trial implementation of commercial factoring pilot work was permitted in Tianjin Binhai New Area and Shanghai Pudong New Area to explore the approaches to develop the commercial factoring and to better utilize its role in expanding the export and promoting the development of small and medium enterprises. On December 7, 2012, MOFCOM issued the Notice on the Pilot Program of Establishing Commercial Factoring Enterprises in Shenzhen and Guangzhou by Hong Kong and Macao Service Providers, under which the said trial implementation of commercial factoring pilot work was extended to Guangzhou and Shenzhen and qualified investors from Hong Kong and Macau are allowed to establish commercial factoring company in the said cities.  On October 8, 2019, the CBIRC issued the Circular on Strengthening the Supervision and Administration of Commercial Factoring Enterprises to regulate the operating activities of commercial factoring enterprises, clarify regulatory responsibilities and promote the healthy development of the commercial factoring industry.

 

Shenzhen Dafu Xinfu Commercial Factoring Co., Ltd. (formerly known as Shenzhen Jiufu Xinfu Commercial Factoring Co., Ltd.), which is a subsidiary of our consolidated affiliated entities, is approved by competent local branch of the MOFCOM, the former commercial factoring regulatory authority, to conduct factoring business.

 

Regulations Related to Online Sales of Securities Investment Funds

 

On December 17, 2015, CSRC and PBOC promulgated the Measures for the Supervision and Administration of Money Market Funds, or the Money Market Funds Measures, which became effective on February 1, 2016. Pursuant to the Money Market Funds Measures, money market fund, or MMF, refers to a fund invested in money market instruments and authorized to subscribe for and redeem fund shares on each trading day. Pursuant to the Money Market Funds Measures provides as a general rule that no person may engage in the fund sales promotion, share offering, subscription, redemption or other related activities without relevant fund sales business qualifications granted by CSRC. In addition, several disclosure rules must be observed during the fund sales business. When fund managers, fund sales agencies and internet companies cooperate to conduct online sales of MMFs, certain information (e.g., the providers of fund sale services, potential investment risks and the names of MMFs being sold) shall be disclosed in a conspicuous way to the investors. And for fund managers, fund sales agencies, fund sales payment institutions and internet companies which provide to investors quick redemption or other value-added services, they must fully disclose the rules of such services such as those regarding the expenses and restrictions, and shall not exaggerate the convenience of such services, Further, the fund managers, fund sales agencies and internet companies shall explicitly agree on certain terms, which include the scope of cooperation, the legal relationships, information security, client information protection, legal compliance, emergency response mechanisms, prevention of illegal securities activities, post-termination operation schemes, delinquency liabilities and the protection of investors’ rights and interests. Besides duties under the Money Market Funds Measures, fund sales agencies are concurrently required by the Administrative Measures for the Sale of Securities Investment Funds (which was promulgated by the CSRC on March 15, 2013) to file with relevant governmental authorities certain information in connection with its online sale of securities investment funds, including MMFs.

 

94


Table of Contents

 

Our online platform, 9F Wallet, operated by Jiufu Shuke, one of our variable interest entities, has cooperated with certain fund managers and fund sales agencies in their online sales of fund investment products. We have taken and will continue to take proper measures to ensure compliance with applicable law rules and regulations, including those on disclosure and information filing.

 

Regulations Related to Anti-money Laundering

 

The PRC Anti-money Laundering Law, or the AML Law, promulgated by the Standing Committee of the National People’s Congress on October 31, 2006 and effective since January 1, 2007, sets forth the principal anti-money laundering requirements applicable to financial institutions as well as non-financial institutions with anti-money laundering obligations, including the adoption of precautionary and supervisory measures, establishment of various systems for client identification, retention of clients’ identification information and transactions records, and reports on large transactions and suspicious transactions. Pursuant to the PRC Anti-money Laundering Law, financial institutions subject to the PRC Anti-money Laundering Law include banks, credit unions, trust investment companies, stock brokerage companies, futures brokerage companies, insurance companies and other financial institutions specified by the State Council, while the list of the non-financial institutions with anti-money laundering obligations will be published by the State Council. The PBOC and other governmental authorities issued a series of administrative rules and regulations to specify the anti-money laundering obligations of financial institutions and certain non-financial institutions, such as insurance brokerage companies, insurance agencies and payment institutions. However, the State Council has not promulgated a list of the non-financial institutions subject to anti-money laundering obligations.

 

The Internet Finance Guidelines, the Interim Measures and the Custodian Guidelines require online lending information intermediaries to comply with certain anti-money laundering requirements, including the establishment of a customer identification program, the monitoring and reporting of suspicious transactions, the preservation of customer information and transaction records, the provision of assistance to the public security department and judicial authority in investigations and proceedings in relation to anti-money laundering matters, cooperation with custodian banks to fulfill anti-money laundering obligations. The Custodian Guidelines also requires that the anti-money laundering obligation be included in the fund custodian agreements between online lending information intermediaries and custodian banks.

 

CIRC promulgated the Administrative Measures for the Anti-money Laundering Work in the Insurance Industry, or the Insurance AML Measures, on September 13, 2011, to set forth anti-money laundering requirements applicable to insurance companies, insurance assets management companies, insurance agencies and insurance brokerage companies. Insurance brokerage companies are required to provide insurance companies with customer identification information, and if necessary, copies of identification cards or other identification documents of customers, establish an internal control system for anti-money laundering, conduct anti-money laundering training, properly deal with major money-laundering cases involving them, cooperate during anti-money laundering supervision, inspections, administrative investigations, and criminal investigations, and keep confidential information related to anti-money laundering investigations. The senior management officers of insurance brokerage companies are also required to be familiar with anti-money laundering laws and regulations.

 

95


Table of Contents

 

On October 10, 2018, the PBOC, the CIRC and the CSRC jointly promulgated the Administrative Measures for Anti-money Laundering and Counter-terrorism Financing by Internet Finance Service Agencies (for Trial Implementation), effective as of January 1, 2019, which specify the anti-money laundering obligations of internet finance service agencies and regulate that the internet finance service agencies shall (i) adopt continuous customer identification measures; (ii) implement the system for reporting large-value or suspicious transactions; (iii) conduct real-time monitoring of the lists of terrorist organizations and terrorists; and (iv) properly keep the information, data and materials such as customer identification and transaction reports etc.

 

We have formulated and adopted certain policies and procedures, including internal controls and “know-your-customer” procedures, aimed at preventing money laundering and terrorism financing. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—Any failure by our third-party service providers to comply with applicable anti-money laundering and anti-terrorism financing laws and regulations could damage our reputation.”

 

Regulations Related to Value-added Telecommunication Services

 

General administration of value-added telecommunication services

 

On September 25, 2000, the State Council promulgated the Telecommunication Regulation of the People’s Republic of China, or the Telecom Regulation, which was amended on July 29, 2014 and February 6, 2016 respectively. The Telecom Regulation is the primary PRC regulation governing telecommunication services and sets out the general regulatory framework for telecommunication services provided by PRC companies. The Telecom Regulation requires telecommunication service providers to obtain from the MIIT or its provincial level counterparts an operating license prior to the commencement of their operations. The Telecom Regulation categorizes telecommunication services into basic telecommunication services and value-added telecommunication services. Pursuant to the Telecom Regulation, value-added telecommunication services are defined as telecommunication and information services provided through public networks.