Having failed to raise further venture capital, Make.V, a startup on online content production and distribution, turned to Taobao to sell its stake which is priced at 120 Yuan for every 100 shares. Surprisingly, within a month, 1191 individuals bought a total of 680 thousand shares that amount to 816 thousand Yuan.

This is, actually, the second time Make.V sold shares on Taobao. The first round happened in last October, totaling the funding to 1.2 million Yuan for 6% of the company. Make.V would, based on contracts, will hold the shares for thus many investors and pay dividends accordingly.

It’s a common practice to raise private money; however, when it is posted somewhere online like on Taobao, it becomes a public offering. It is illegal for a company like Make.V to have so many investors, according to Chinese regulations. In China the number of shareholders a limited liability company has cannot be more than fifty. A private joint stock company has to limit the shareholder number to 200.

Unsurprisingly, Taobao took it off the shelf after “detecting” the “illegal good”. According to the Taobao statement, regulations in China don’t allow companies or individuals to raise fund by issuing stocks, bonds, debts and so on before having gone through the legal process.

Make.V said they had consulted a law firm and Beijing Municipal Lawyers Association before the fundraising. They knew there would be regulatory risks and promised to buy back the shares any time when it was identified as illegal fund raising. The company has refund 243 buyers who didn’t confirm receiving the “goods” on Taobao.

When fundraising is a big problem

Make.V, founded in June 2012, is a media company producing and distributing online content. Producing original content as cost-intensive as videos didn’t seem attractive enough to venture capitalists. After the seed funding round, the company found it difficult to raise more capital, according to Zhu Jiang, founder of Make.V and former head of subscription-based premium service of iQiyi, the online video service wholly owned by Baidu. Investors who showed interest asked for too much of the company with a comparatively small amount of money. Finally Zhu and his team turned to Taobao.

Mirror Fun, a Taobao store, recently raised 15 million Yuan from a flock of shareholders through Hong Ling, an online crowdfunding service. Actually it works in the same way with the Make.V case. But so far nobody stepped in to say it’s illegal. Hundreds of online peer-to-peer services emerged in the past couple of years in China. There hasn’t been any regulation in place and frauds happen from time to time. The public are waiting for regulators to put the emerging market in order but never expect it to be illegal.

They also hope that selling stake on Taobao to become legal for Chinese small businesses are really in need of money. It is hoped that the Internet to be a better platform for lenders and borrowers to reach deals in a more efficient fashion. While it may not take a long time to have crowdfunding services under regulation, it must be very hard to manage Taobao sellers with such a business.

Tracey Xiang is Beijing, China-based tech writer. Reach her at traceyxiang@gmail.com

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