01 Entrepreneurship is not easy
Most of the platforms involved in criminal activities often suffer severe losses due to poor management, making it impossible to continue operations. For example, promised roadmaps were not completed as scheduled due to technical difficulties or insufficient investment scale, and the promised empowerment benefits of collections were not fulfilled on time. As a result, users complained and reported that the platform was planning to run away.
It can be said that one wants to leave while the other wants to stay.
How to prevent the losses caused by poor entrepreneurship from evolving into scams in the eyes of netizens? If entrepreneurs are really detained by the police, how can they prove their innocence? The following will be based on our practical experience and shared with everyone, hoping it will be helpful.
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02 What is fraud?
From a legal perspective, fraud is a criminal act in which the perpetrator fabricates facts and conceals the truth for the purpose of illegal possession, deceiving others into giving a certain amount of property. The core elements of this crime are the perpetrator’s intention of illegal possession and the use of fabricated facts and concealed truth to deceive others, namely “deception + possession”.
In everything, the end justifies the means. Since we know where the pitfalls of being identified as fraud lie on the entrepreneurial path, we must do our work in advance and take a detour! Avoid having our legitimate business activities being identified as fraud.
03 How to avoid entrepreneurship becoming “deception”?
In general, “deceptive behavior” should not occur throughout the entire operation of the platform. When we talk about deception, of course, we are not referring to pure fraud (we always believe that Ponzi schemes are a minority). Instead, we are referring to certain methods and measures widely used in the market, which may be regarded as “fraud” by some judicial personnel who do not understand new business models, resulting in direct interrogations and investigations after platform losses and user reports.
Therefore, in order to break free from this embarrassing situation, as entrepreneurs, we cannot rely on preaching and educating judicial personnel afterwards, but must take precautions in advance.
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Early stage of the project
The focus of this stage is on publicity, ensuring the authenticity of the platform’s external publicity. Most scams require active and proactive dissemination of ideas, which is regarded as influencing victims to form misconceptions and prompting them to make incorrect property disposal actions (giving money). And when the platform engages in false advertising (such as claiming to be a state-owned enterprise’s strategic investment or claiming that items are sold out within one minute), exaggerated advertising (at least 10 times increase), and arbitrary promises (a certain percentage of the total sales amount will be distributed to users as dividends), it becomes an anchor point for the commission of fraud crimes.
False advertising is unacceptable, needless to say. But sometimes, as an innovative thing, there will inevitably be some beautiful visions, and we will strive towards a difficult entrepreneurial goal (such as many entrepreneurs saying they want to create an online metaverse). However, how can we avoid being recognized as “excessive exaggeration” and thus constituting fraud?
Our advice to entrepreneurs is to provide risk disclosure in advance. As a new thing, NFT does not have a widely recognized consensus in society, and it itself has high-risk characteristics. By doing risk disclosure in the early stages, users can clearly understand the many risks they may face (including the risk of complete loss of principal). This not only reduces criminal risks but also helps to build corresponding expectations in users’ minds, reducing communication costs and risk disposal costs in the later stages.
Promising recklessly is just like false advertising, which cannot be divorced from reality. Planning should be based on established and existing capabilities. Even if some things are still uncertain, a feasible implementation roadmap should be provided. It should not be like a tree without roots or water without a source.
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Mid-term of the project
The focus of this stage is the operation of the project, corresponding to the right of users to know about the platform’s operations and the right to realize the empowerment benefits of purchasing NFTs. How is the project expected to progress? How is the product development progressing? Is there a delay in empowering benefits? What is the situation if the goods to be delivered are not being delivered? If the company has not released any new collections for a long time, is there a major adjustment in operations? Is the rumor that the company is going to run away true or not?
Entrepreneurs can check against the above questions. This stage is probably the root cause of the real problems and the beginning of the divergence of ideas between rights holders and those being protected in the later stages. However, the gap between ideas and understanding is natural. Only when users’ right to know is guaranteed and they have a comprehensive understanding of the project’s status, they will not feel deceived.
Of course, we understand that some projects cannot be disclosed one by one based on the principle of business confidentiality. However, by comparing with the right of shareholders of a company and the right of investors in private equity funds, we believe that it is necessary to disclose information appropriately. This not only takes responsibility for users but also promotes supervision and encourages the platform to develop in a benign, stable, and healthy manner.
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Later stage of the project
The focus of this stage is project liquidation. At this stage, the project is close to completion, and losses have become a fact (profits do not need to be discussed). What is needed is the proper disposal of the project, users, and funds. At this stage, good communication should be maintained, and users’ opinions and suggestions should be fully listened to and reassured. If there is any remaining funds, they should be allocated and returned according to the agreement (if any).
Do not have a negative attitude, thinking that the project is over, and everything ends after the loss. This will only intensify conflicts, escalate disputes, and ultimately fail to meet the most basic rights of users. It is inevitable that they will seek protection. Once there are a large number of rights holders, forming a “collective” event and being officially classified, there will be no way out.
04 Pay Close Attention to the Flow of Funds
Why do some cases of false advertising only result in civil fraud and can only be resolved through court prosecution, while other cases involve criminal offenses and require the state to use violent means to punish? This is undoubtedly a question for many entrepreneurs.
From a legal perspective, there may be many factors, but one of the most important factors is the requirement for fraudulent intent to illegally possess others’ property. From the perspective of risk prevention, this translates to the issue of fund flow.
Where does the money come from, where is it held, and how is it used? These are the three basic questions. The first question will not be discussed here. We will focus on risk prevention in the latter two.
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Establish standardized financial systems
The top priority for compliance is always the compliance of financial systems. Platforms should first establish strict financial systems (financial management and financial supervision systems) to isolate certain risks and be able to provide timely evidence when investigated. For example:
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If a company has multiple business lines, it is recommended to have different corporate accounts for different business lines to avoid confusion;
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When receiving external payments, it is necessary to use the company’s account to receive payments and avoid using shareholders, legal representatives, or even employees’ personal accounts for receiving payments;
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The company must pay taxes in accordance with the law for its operating income and provide users with related products such as invoicing or customer service;
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Annually hire a third-party audit firm to audit the company’s financial situation and keep relevant documents.
For some start-up companies, the above measures may seem cumbersome, but we still strongly recommend that entrepreneurs do their homework and implement compliance measures. Otherwise, the cost is often painful.
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Strict control of fund expenditures
Where the money is spent is an important criterion for determining whether there is “fraudulent intent.” The Supreme People’s Court’s “Summary of the National Court’s Symposium on the Trial of Financial Crime Cases” summarizes seven typical situations of fraudulent intent in financial fraud crimes. Among them, the first situation, “knowingly obtaining funds without the ability to repay and deceiving a large amount of funds,” refers to anticipated performance capability, while the remaining six situations are directly related to the flow of funds. They are:
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Escaping after illegally obtaining funds (fleeing with the money)
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Squandering and deceiving funds (violation of earmarked use, used for extravagance)
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Engaging in illegal activities using fraudulently obtained funds (such as gambling)
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Withdrawing, transferring, or concealing funds to evade repayment (direct transfer)
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Hiding, destroying accounts, or faking bankruptcy or closure to evade repayment of funds (balance transfer)
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Other acts of illegally possessing funds and refusing to return them (other).
Above all, entrepreneurs should strive to avoid the six situations mentioned above, otherwise they are very likely to step on a landmine. In addition, if the investment funds are used for platform operations, salary payment, etc., corresponding rules and regulations should be set in advance to ensure that there is a basis for fund disbursement, a process for approval, and financial vouchers for these three important tasks. It is important to avoid non-standard operations such as the company’s actual controller withdrawing funds from the company to personal accounts at will, as these are the key issues of concern when questioned by the public security authorities.
05 Summary
Entrepreneurship is an adventure, and risks naturally exist forever, especially in new fields where there is no zero risk, but only feasible measures to continuously control risks and reduce uncertainty. The above suggestions are based on our project operations and judicial practices, hoping to help entrepreneurs avoid various unnecessary disasters.
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