Attorney Shao Shiwei | When Business Models Operate in Regulatory Gray Areas, What Are the Potential Legal Risks for Practitioners?

In many economic criminal cases handled by Attorney Shao, the prevailing perspective of company owners prior to the incident is often as follows:

• This is an industry with significant profit potential / This is a promising direction for entrepreneurship;

• Many peers are engaged in this business, and they appear to have earned substantial profits, so I must seize this opportunity;

• I searched for relevant information online and reviewed legal provisions, feeling that there was little risk;

"It is neither illegal nor unprofitable, and everyone is doing it"—this is the reason many entrepreneurs enter a certain industry, which appears reasonable and logical.

"Attorney Shao, do you think what I did was illegal? Why was I arrested?" Almost every time I meet with clients in detention centers, I am asked the same question. I deeply understand their feelings and circumstances.

However, the issue lies in the fact that these seemingly logical business judgments, once placed in a regulatory gray area , begin to entail complex risks. Often, practitioners are not knowingly committing offenses; rather, during the explosive growth of an industry, they inherently operate within legal ambiguities.

Taking digital collectibles as an example, 2022 was a period of explosive growth for the industry. Statistics indicate that approximately 2,270 new platforms were established throughout that year. Most of the platforms involved in fraud cases related to digital collectibles that my team has represented in recent years were established during this phase. The combination of rapid industry growth and regulatory absence led to a concentrated outbreak of risks within a short period.

Another example is the business model of loan facilitation companies and loan supermarket apps charging membership fees. This model actually emerged as early as 2018, with tens of thousands of companies nationwide adopting nearly identical practices. Although this business model was somewhat controversial, due to the lack of explicit prohibitive provisions in the law, there were rarely reports of criminal liability being pursued solely for charging membership fees (unless accompanied by illegal debt collection, infringement of citizens' personal information, etc.). Media reports mostly highlighted platforms being criticized by regulatory authorities. However, in recent years, there have been multiple cases where platform executives were sentenced to life imprisonment for this model, a drastic shift sufficient to shock the entire industry.

There are also highly controversial cases. For instance, can certain functional modules of virtual currency exchanges be deemed as involving gambling? Both supporting and opposing viewpoints have certain bases. Furthermore, why are some Web3 news platforms, accessible in mainland China only via VPN, prosecuted for the crime of illegally providing intrusion or control programs for computer information systems, while others continue to operate safely and normally?

Based on the cases I have handled, although the industry types vary, they share a commonality: most belong to emerging or niche industries, with operations situated in legal or regulatory gray areas. Practitioners generally have a vague understanding of risks, and the characterization of the involved conduct often remains highly controversial in judicial practice.

As mentioned above regarding the limitations of law, legislative enactment can never keep pace with the rapid development of industries. Nor can the law be exhaustive, detailing specific clauses to regulate every industry, every business model, and every individual act.

So, how can the correct implementation of law be ensured? In reality,it relies on the case-handling personnel's understanding of the law, and there are numerous complex factors in individual cases in practice.

For those who have never experienced criminal cases, they generally believe that the law is black and white, and that an act is deemed criminal only when it fully complies with the provisions of the law. Unfortunately, there is a significant disparity between practice and statutory provisions.

For example, consider the assembly of building blocks. If "perfect fit" is the standard for an ideal scenario constituting a crime, then in reality, even a fit of 50%, or even 10%, may be considered by the prosecution as having "clear facts and sufficient and reliable evidence," ultimately resulting in the case being transferred to court and a guilty verdict being rendered.

Conversely, even with a 100% fit, a finding of not guilty may result due to other factors (for example, I previously handled a typical not-guilty case involving illegal business operations, titled "Real Case of Illegal Business Operations: Successful Defense Resulting in Acquittal, Republished by Shanghai Legal Daily》）。

Especially for new types of crimes and highly controversial cases,the professional competence of both case-handling personnel and defense attorneys is equally important。

For instance, in several NFT digital collectible cases represented by my team, one occurred in Location A and another in Location B. Both platforms were legitimate companies conducting business, yet the outcomes were vastly different:

In Location A, the case-handling personnel were willing to communicate fully with the attorneys, understood the platform's business model, believed that emerging industries should be treated with caution and not subjected to a "one-size-fits-all" approach, and ultimately the case concluded with a decision not to prosecute (see "Successful Not-Guilty Defense in Fraud Case | From Facing Over Ten Years of Imprisonment to Acquittal!》、《Case Story | An NFT Digital Collectible Platform Suspected of Fraud, Ultimately Concluded with Acquittal!》。

In Location B, the case-handling personnel insisted that "as long as user funds were collected, it constitutes fraud." The judge even analogized the case to telecom fraud incidents in Northern Myanmar, referencing prior precedents, and directly imposed a heavy sentence.

Similar facts led to completely different conclusions due to significant disparities in judicial cognition.

When a business model operates in a regulatory gray area, practitioners often perceive it as an opportunity, but in reality, it is more akin to a double-edged sword.

First, from a commercial perspective, as pioneers in an industry or in a niche sector, the regulatory vacuum allows enterprises greater space to experiment with business models whose boundaries are ambiguous (such as early P2P lending, loan supermarket membership fees, cryptocurrency trading, etc.), rapidly iterate products, and maximize satisfaction of market demands (even if distorted). Due to relatively limited competition, substantial profits may be achieved in the short term. Companies also avoid investing huge sums to meet regulatory requirements (such as license applications, system certifications, staffing for compliance, risk reserve funds, etc.). Operational costs are primarily focused on technology and marketing. Without entry barriers or business restrictions, enterprises can rapidly expand their market share, leveraging capital to acquire users quickly and achieve exponential growth. Many internet giants experienced this phase in their early stages.

Second, from a legal and compliance perspective, this "leniency" precisely lays the groundwork for significant hidden dangers. Entrepreneurs often believe that "anything not explicitly prohibited by law is permitted," generally lacking compliance awareness and seldom proactively engaging legal teams to assess risks. However, once regulatory measures are implemented, or judicial authorities pursue accountability retrospectively, the entire business model may instantly be deemed illegal. Simultaneously, a large number of users may file reports and seek rights protection, leading to a complete halt in operations, while executives may even face serious criminal charges.

Finally, from the perspective of judicial practice, in the absence of explicit provisions, case-handling personnel possess considerable discretion,and their understanding of the essence of the business model will directly determine the survival of the enterprise. If law enforcement agencies mechanically apply catch-all charges such as fraud, illegal business operations, or illegally providing intrusion or control programs for computer information systems, the outcome is often extremely unfavorable for entrepreneurs. This is why the role of attorneys in such cases is not merely defense, but also assisting case-handling personnel in seeing through complex commercial appearances to understand the essence of industry operations, thereby achieving optimal defense results.

Based on our team's extensive experience in representing companies involved in criminal cases, the wisest strategy for entrepreneurs is to proactively embrace regulation at the initial stage of business development, establish self-regulatory mechanisms, and, when necessary, engage professional legal teams to continuously explore compliance pathways during corporate growth. Simultaneously, maintaining active communication with regulatory authorities is essential to achieve sustainable long-term development.

While pursuing emerging opportunities, only by adhering to the baseline of compliance can enterprises truly proceed more steadily and further.