¡°Digital collections¡± normally refer to digital works based on the NFT technology. NFT, Non-Fungible Token, is a non-replicable, non-tamperable, and indivisible encrypted digital rights certificate based on the blockchain technology. ¡°Digital collections¡± are mostly non-standardized virtual commodities, and their prices fluctuate greatly as there is not an established value confirmation system. Some people then would collude to hype up the ¡°collections¡± through bidding, so as to delude people into buying them.

Recently, the Shanghai Minhang District People¡¯s Court (hereinafter referred to as the ¡°Minhang Court¡±) heard a fund-raising fraud case involving ¡°digital collections.¡±

[Case Review]

In June 2022, the defendant ZHANG and the defendant LIU decided to set up an online platform, where they¡¯d sell the ¡°digital collections¡± that they had made, through the blockchain technology, out of pictures purchased at low prices or downloaded for free from the Internet. They claimed that the ¡°collections¡± were in collaboration with official cultural associations and various museums.

After the platform was established, ZHANG and LIU did the promotion via channels like WeChat official accounts, WeChat groups, QQ groups, and other social networking sites, saying that ¡°once you buy any of these collections, not only can you purchase on a regular basis a certain ¡®digital collection¡¯ at twice the original price, you can also enjoy exclusive membership rights such as platform dividends and the right to purchase land first in the Metaverse.¡±

They also set up some special rules on the platform. For example, when people have purchased multiple specific ¡°digital collections,¡± they can combine them into rare and high-end ¡°digital collections.¡± They can also buy mystery boxes for the rankings, and redeem for gifts such as cash, iPhone, and expensive wine. To make it more credible, ZHANG also opened the secondary market to users for trading, and increased the transaction volume and price by selling and buying all by himself, creating an impression that it was a hot business and there was much room for appreciation.

So the platform was getting more attention, and ZHANG and LIU also profited from it. After receiving the users¡¯ payment, they¡¯d withdraw the money and divide it.

At the end of September of that year, given that they had got the money and in order to evade their business commitment and legal liability, ZHANG stopped renewing the server and closed the platform. Users were unable to withdraw cash and view the ¡°digital collections.¡±

It was ascertained that the platform had absorbed money from thousands of users totaling more than 1.34 million yuan, causing victims to lose a total of more than 410,000 yuan. During the trial, both defendants voluntarily pleaded guilty and accepted punishment, and returned all illegal gains to compensate for the losses of the victims.

[Case Study]

According to the Minhang Court, the defendants ZHANG and LIU used fraud methods to raise large amounts of money for the purpose of illegal possession; their behavior constituted the crime of fund-raising fraud, and it was a joint crime. The charges pressed by the public prosecution were established. In the joint crime, the defendant ZHANG was the principal offender; the defendant LIU was an accessory and should be given a mitigated punishment in accordance with the law. ZHANG and LIU could be given a lesser punishment in accordance with the law for truthfully confessing their crimes; and they might be treated with leniency in accordance with the law for voluntarily pleading guilty and accepting punishment. A lighter punishment might be given as appropriate as ZHANG and LIU both voluntarily returned all their illegal gains to compensate for the victims¡¯ losses. Probation might be applied after considering the nature and circumstances of the crime, how much harm the defendants had caused to society, and how much repentance they showed.

Accordingly, the Minhang Court sentenced the defendant ZHANG to three years¡¯ imprisonment, suspended for three years, and a fine of 100,000 yuan for the crime of fund-raising fraud; and sentenced the defendant LIU to two years and six months¡¯ imprisonment, suspended for three years, and a fine of 100,000 yuan for the crime of fund-raising fraud.

1. Does the sale of ¡°digital collections¡± constitute illegal fund-raising?

To determine whether an act constitutes illegal fund-raising, we should consider from the following aspects: whether it is illegal; whether it is public to society; and whether it lures by promise of gain. In this case, the defendants¡¯ behavior constitutes illegal fund-raising.

Illegal: Users of the platform involved purchased the ¡°digital collections¡± for the purpose of obtaining expected returns. Their purchase and sale of the ¡°digital collections¡± and withdrawal of cash from the platform is actually an act of investment. The two defendants used the platform to collect and precipitate funds to form a liquidity pool. Their behavior, in essence, was to absorb public funds in disguised form through commodity repurchases and secondary market transactions. Judging from the sources of the ¡°digital collections¡± involved, their appreciation and collection value, and the fact that they were not applied on the platform involved, the defendants did not provide substantial goods as consideration for the funds paid by the users. The defendants also violated the financial management regulations and established a secondary market for trading without obtaining permission to establish a trading venue for the rights and interests of cultural artworks.

Public to society: The defendants instigated others to publicly promote their ¡°digital collections¡± to unspecified groups of people through online channels such as WeChat public accounts, WeChat groups, QQ groups, and other social platforms; and the funds absorbed also came from unspecified groups of people.

Luring by promise of gain: The defendants fabricated facts and concealed the truth, causing people to have misunderstandings and invest in the ¡°digital collections¡± issued by their online platform. They lied about the sources of the ¡°digital collections¡± and made false promises of rebates and expected appreciation, and used false transactions to create the illusion of appreciation.

2. How does the court determine the ¡°purpose of illegal possession¡±?

The key to distinguishing illegal absorption of public deposits from fund-raising fraud lies in the determination of the ¡°purpose of illegal possession.¡± Fund-raising fraud is illegal fund-raising based on fictitious facts, with the subjective purpose of occupying investors¡¯ investment funds. After the funds are raised, they are not used or not mainly used for production and business activities.

In this case, after the platform involved absorbed funds from thousands of users totaling more than 1.34 million yuan, the defendants withdrew the money, divided it, and closed the platform, so the users were unable to withdraw the money and view the ¡°digital collections.¡± The defendants also disbanded the WeChat groups and QQ groups, so the users could not reach out to the platform, and the victims suffered a loss totaling more than 410,000 yuan. The fact that the defendants, after illegally raising the funds, escaped and transferred the money and failed to return it should be deemed as having the purpose of illegal possession.

3. How do people protect themselves against new illegal fund-raising activities?

Illegal fund-raising activities violate financial management regulations and absorb a large amount of social funds, which undermine the healthy and harmonious development of the market economy.

The people¡¯s court suggests that investors should:

(1) Be rational about investment. As the models and methods of illegal fund-raising are changing, there are new types of scams that are more deceptive. Investors should always keep in mind that ¡°Financial management is risky and one should be cautious about investment.¡± They should be wary of the scams under the guise of technological innovation, green industry, etc., be aware of the dangers of illegal fund-raising, and keep increasing their vigilance.

(2) Choose formal investment channels. Before investing, investors can check online whether the company has been legally registered and has the qualifications to raise funds. They should choose formal financial products and be responsible for their own property rights.

(3) Be wary of high yield traps. When presented with investment projects that ensure you will get ¡°high returns¡± and become ¡°rich overnight,¡± investors should compare them with the loan interest rates in banks and with the returns of general financial products, and be cautious that they might be traps or tricks.

[Relevant Laws]

Criminal Law of the People¡¯s Republic of China

Article 192 Whoever uses fraudulent methods to raise funds for the purpose of illegal possession, and the amount is relatively large, shall be sentenced to fixed-term imprisonment of not less than three years but not more than seven years and shall also be fined; if the amount is huge or there are other serious circumstances, he shall be sentenced to fixed-term imprisonment of seven years or above or life imprisonment, and shall also be punished with a fine or confiscation of property.

If an organization commits the crime in the preceding paragraph, the organization shall be fined, and the person directly in charge of it and other directly responsible persons shall be punished in accordance with the provisions of the preceding paragraph.

Article 25 A joint crime refers to two or more people committing a crime jointly and intentionally.

Article 26 Whoever organizes and leads a criminal group to carry out criminal activities or plays a major role in a joint crime is a principal offender.

Principal offenders other than those specified in paragraph 3 shall be punished in accordance with all the crimes which they participate in or organize or direct.

Article 27 A person who plays a secondary or auxiliary role in a joint crime is an accessory.

An accessory should be given a lesser or mitigated punishment or exempted from punishment.

Article 67 Although a criminal suspect does not surrender as stipulated in the preceding two paragraphs, yet he truthfully confesses his crime, he may be given a lesser punishment; if he truthfully confesses his crime and avoids particularly serious consequences, he may be given a mitigated punishment.

(By Lu Jin, Song Zhaoyuna, Chen Linqing and Li Yujie, Minghang District People¡¯s Court)