Startup media company launches controversy

An online fundraising attempt by a Chinese media startup company has triggered widespread controversies over possible violation of Chinese securities laws.

The company, Make.V, raised about 12 million yuan ($1.9 million) from 1,191 purchasers who bought membership cards between Jan 9 and Feb 3 on Taobao, one of China's largest e-commerce platforms.

On Tuesday, the website urged Make.V to stop selling the membership card because it violated national laws and regulations, according to Zhao Nige from Taobao's public relations department.

Zhao did not say what regulations the product violated.

Zhang Weiguang, a Shanghai-based lawyer who specializes in securities law, said Make.V risked committing illegal fundraising given that it collected money from the public and the number of subscribers surpassed 50.

Zhu Jiang, chief executive officer of Make.V, said he came up with the idea to raise money from the online platform after half a year of efforts seeking investors across the country turned out to be "a wild goose chase", and the startup team could not afford to wait.

"We are actually selling a service pack, and the money collected will help the company operate properly before we earn our first revenue," said Zhu.

According to the contract sent to members along with membership cards, anyone could subscribe to 100 shares of Make.V by buying a 120-yuan ($19.30) membership card.

Members with a subscription can have access to e-magazines and some video programs.

The shares affiliated to the membership card as complimentary can be traded among members, and some members had already sold their shares to other members by Tuesday.

Zhu said the company planned to sell shares on Taobao at 1.2 yuan per share, but later switched to membership cards upon a lawyer's suggestion as Taobao does not recognize private equities as a product that can be traded on the platform.

"The pattern of raising money is similar to crowd-funding, which is popular among startups in many other countries including the United States, and which encourages people with the same interests to put money together to achieve a goal," said Zhu.

The membership contract does not specify high returns or interest to members, said Zhu.

"Sales of membership cards were not public offerings, because so far we have only five shareholders as all the money collected from membership card sales is now under the management of one shareholder," said Zhu.

No further online sales of membership cards will be launched, as a company in Zhejiang has offered 140,000 yuan to buy some 120,000 shares.

"The money will be enough to sustain operations because we are expecting our first business revenue soon," said Zhu.

A source with a Hangzhou-based private venture said he supports Zhu's experiment with raising funds from online platforms.

"The funding environment for startups in China is harsh ― we are dealing with serious money from investors, so it really takes time and effort to decide whether we invest in a project," the source said.

For crowd-funding projects, each shareholder, or members in Zhu's case, bears less risk due to the small sum invested compared to that of private ventures, and if Zhu and his team give transparent financial information to members and eventually bring back capital and even a yield to members, the model can be considered a win-win situation.

"I hope Zhu's action may push forward the development of a legal system regulating crowd-funding, a nice model for startups in China," the source said.

He Wei contributed to the story.