Private Lending or Illegal Fundraising? The Line Between Illegal Absorption of Public Deposits and Fundraising Fraud

Ordinary private lending is protected by law — but when illegality, public solicitation, promised returns, and an unspecified audience combine, it may become illegal absorption of public deposits, or even fundraising fraud if intent to permanently take the money is shown. This article maps the line, the thresholds, and the defense space.

Lending money to an acquaintance at an agreed interest rate is protected private lending; a company borrowing from employees and relatives for working capital is not necessarily unlawful. Yet the same “borrow money — pay returns” pattern can cross into criminal law once it reaches the general public and carries public solicitation and promised returns. In practice, many parties only realize after coercive measures are taken that what they were doing was not “financing” but “illegal fundraising.” Drawing the line matters not only for guilt or innocence, but for which offense and how heavy a sentence.

One Red Line: Four Features at Once

Under the Supreme People's Court's Interpretation on Illegal Fundraising, illegal absorption of public deposits requires four conditions at once: (1) illegality — raising funds without the required license or under the guise of lawful business; (2) publicity — soliciting through media, pitch events, flyers, text messages, or the internet; (3) inducement — promising repayment of principal plus interest or other returns in money, goods, or equity within a set period; and (4) a public audience — taking funds from an unspecified segment of the public. All four must be present. The Interpretation also makes clear that raising funds without public solicitation, confined to relatives, friends, or persons within a unit, is not illegal absorption.

Which Offense: Illegal Absorption vs. Fundraising Fraud

Article 176 of the Criminal Law defines illegal absorption of public deposits; Article 192 defines fundraising fraud. Their objective conduct is similar; the watershed is whether the actor subjectively intended to permanently take the money (“illegal possession”). Illegal absorption is generally measured by the full amount raised, with a statutory maximum of ten years (the Eleventh Amendment raised the top tier); fundraising fraud requires “deceptive means” plus intent to possess, starts at three years, and for huge amounts or other serious circumstances reaches seven years to life. Whether that intent exists often decides whether the party faces three years or a decade or more.

How “Intent to Possess” Is Found

Courts do not rely on confessions but infer intent from where the money actually went. The Interpretation lists: not using funds for business, or using them at a scale grossly disproportionate to the amount raised, so that repayment fails; squandering the funds; absconding with them; using them for illegal activities; withdrawing, transferring, or concealing assets to evade repayment; hiding or destroying accounts or staging fake bankruptcy; and refusing to explain where the money went. The key evidence is therefore the books, bank records, and use of funds — which is why transparency, dedicated use, and genuine operations are often the strongest defense foundation, while destroying records is the worst possible response.

Amounts and Numbers: When Prosecution Begins

Illegal absorption is prosecuted only when statutory thresholds are met. Under the Interpretation and its 2022 amendments, common starting points are: over RMB 1 million absorbed, over 150 people solicited, or over RMB 500,000 in direct losses to depositors; higher figures fall into “huge amount or other serious circumstances,” with heavier sentencing. Whether the audience was “an unspecified public” is a recurring battleground — whether an acquaintance circle, relatives and friends, or a unit's own employees count as “unspecified” turns on the manner of solicitation and each participant's relationship, and is a key opening for the defense.

Civil–Criminal Overlap: Is the Contract Automatically Void?

Illegal fundraising cases are often entangled with private-lending lawsuits. Under the private-lending judicial interpretation, if a court finds after filing that the lending itself is suspected of illegal fundraising, it should dismiss the suit and refer the leads to the police or procuratorate; yet where the lending conduct is merely suspected of a crime — or a crime has been found by an effective judgment — the loan contract is not automatically void and its validity is judged under the Civil Code. So even after criminal proceedings begin, a lender may still assert rights civilly, and a party should not abandon civil claims or evidence preservation merely because “criminal comes first.”

Where the Room for Defense Lies

First, the charge: moving a case from fundraising fraud down to illegal absorption often makes a real sentencing difference. Second, the role: distinguishing organizers and planners from ordinary helpers who merely received fixed pay, the latter often securing accessory status. Third, the circumstances: using funds in genuine operations, actively returning money and compensating before indictment, and obtaining forgiveness can support a lighter or reduced penalty — and in minor cases, non-prosecution or exemption; plea-based leniency can stack. Fourth, the actor: where a unit committed the offense, the liability of directly responsible managers differs from that of other directly responsible persons and must be carefully separated.

A Reminder for Parties and Families

When under investigation, the worst move is moving or hiding assets or destroying records — the very hallmarks of “intent to possess.” What helps: explaining where the money went truthfully; promptly preserving evidence of genuine operations, dedicated use, and willingness to repay (contracts, bank records, tax filings, repayment histories); engaging a criminal defense lawyer early to assess the likely charge and a restitution plan; and aligning strategy across the civil and criminal tracks to avoid contradictory statements. The room for release on bail, non-prosecution, or a lighter sentence usually depends on evidence and attitude from the outset, not on last-minute arguments.

The law does not ban ordinary financing; the line lies in audience, means, and purpose — whether funds were solicited publicly from an unspecified audience, whether returns were promised, and whether the money funded genuine operations. Seeing that line clearly is both the baseline of compliance for entrepreneurs and the most effective self-protection for anyone under investigation. Cases differ greatly, though: whether an offense exists, and which one, still turns on the evidence and the latest judicial interpretations, assessed case by case by a qualified lawyer.

※ This article is general legal information, not legal advice on any specific matter. For your individual case, please consult a lawyer.