DRS/A 1 filename1.htm fs12012_chinacommercial.htm
DRAFT - April 22, 2013
Confidentially submitted pursuant to Section 106(a) of the Jumpstart Our Business Startups Act of 2012 
 
As filed with the Securities and Exchange Commission on April 22, 2013
Registration No. 333-________


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
 
China Commercial Credit, Inc.
(Exact name of Registrant as specified in its charter)
 
Delaware
 
6199
 
45-4077653
(State or other jurisdiction of
incorporation or organization)
 
(Primary Standard Industrial
Classification Code Number)
 
(I.R.S. Employer
Identification Number)
 
No. 1688, Yunli Road, Tongli
Wujiang, Jiangsu Province
People’s Republic of China
(86-0512) 6396-0022
 (Address, including zip code, and telephone number, including area code,
of Registrant’s principal executive offices)
 
National Registered Agents, Inc.
160 Greentree Drive, Suite 101
Dover, Delaware 19904
(800) 550-6724
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
 
Copies of all correspondence to:
 
Ellenoff Grossman & Schole LLP
Blank Rome LLP
Barry I. Grossman, Esq. 
Barry H. Genkin, Esq.
Benjamin S. Reichel, Esq.
One Logan Square
150 East 42nd Street, 11th Floor
130 N 18th Street
New York, NY 10017
Philadelphia, PA 19103-6998
Tel: (212) 370-1300
Tel: (215) 569-5514
Fax: (212) 370-7889
Fax: (215) 832-5514
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box:   o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer     o
o Accelerated filer
Non-accelerated filer       x (Do not check if smaller reporting company)
o Smaller reporting company
 
 
 
 

 
 
Calculation of Registration Fee
 
Title of Class of Securities to be Registered
      Amount to be Registered²       Proposed Maximum Aggregate Price Per Share  
Proposed Maximum Aggregate Offering Price
   
Amount of Registration Fee¹
 
Common Stock, $0.001 per share
   
[_____]
   
 [____]
  $  23,000,000     $ 3,137.20  
Total
     
   [_____]
   
 [____]
  $   23,000,000     $ 3,137.20  
 
(1)  
The registration fee for securities to be offered by the Registrant is based on an estimate of the Proposed Maximum Aggregate Offering Price of the securities, and such estimate is solely for the purpose of calculating the registration fee pursuant to Rule 457(o).
 
(2)  
Includes [_____] shares of the Registrant’s common stock subject to an option granted to the underwriter solely to cover over-allotments, if any.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 
 
 

 
 
The information in this prospectus is not complete and may be amended. The Company may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION DATED APRIL 22, 2013
 
China Commercial Credit, Inc.
 
[_____] SHARES OF COMMON STOCK
OFFERING PRICE OF $[_____] PER SHARE
 
We are offering [_________] shares of our common stock.  We expect the initial public offering price of the shares to be between $[___] and $[___] per share.  If the initial offering price of the shares is $[___], the mid-point of the price range for this offering, we will offer [_______] shares.  Currently, no public market exists for our common stock.  We have applied for the listing of the shares on the NASDAQ Capital Market (“NASDAQ”) under the symbol “CCCR”, however no assurance can be given that our application will be approved. If the application is not approved, we will not complete this offering.
 
We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements.  Investing in our common stock is highly speculative and involves a significant degree of risk.  See “Risk Factors” beginning on page 12 of this prospectus for a discussion of information that should be considered before making a decision to purchase our common stock.
 
   
Per Share(1)
   
Total
 
Initial public offering price
  $       $    
Underwriting discount and commissions
  $       $    
Proceeds, before expenses, to China Commercial Credit, Inc.
  $       $    

 
(1)
Based on the mid-point price for this offering.

We have granted the underwriter a [__]-day option to purchase up to an additional [__] shares of our common stock at the public offering price, less the underwriting discount, to cover any over-allotments.
 
The underwriter expects to deliver the shares against payment in New York, New York, on or about ____, 2013.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
Burnham Securities Inc.
 
The date of this prospectus is ___, 2013
 
 
 

 
 
TABLE OF CONTENTS

 
Page
   
USE OF MARKET AND INDUSTRY DATA
1
   
PROSPECTUS SUMMARY
1
   
RISK FACTORS
12
   
USE OF PROCEEDS
30
   
DETERMINATION OF THE OFFERING PRICE
30
   
MARKET FOR OUR COMMON STOCK
31
   
CAPITALIZATION
32
   
DILUTION
32
   
EXCHANGE RATE INFORMATION
33
   
SELECTED CONDENSED FINANCIAL AND OPERATING DATA
34
   
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
35
   
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
36
   
BUSINESS
46
   
DIRECTORS AND EXECUTIVE OFFICERS
61
   
EXECUTIVE COMPENSATION
66
   
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
67
   
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
68
   
DESCRIPTION OF CAPITAL STOCK
69
   
SHARES ELGIBLE FOR FUTURE SALE
70
   
UNDERWRITING
71
   
EXPERTS
76
   
LEGAL MATTERS
76
   
INTERESTS OF NAMED EXPERTS AND COUNSEL
76
   
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
76
   
ENFORCEMENT OF JUDGMENTS
76
   
WHERE YOU CAN FIND ADDITIONAL INFORMATION
76
   
FINANCIAL STATEMENTS
77
   
INFORMATION NOT REQUIRED IN PROSPECTUS
II-1
 
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT, AND THE UNDERWRITER HAS NOT, AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
 
 
 

 
 
USE OF MARKET AND INDUSTRY DATA
 
This prospectus includes market and industry data that has been obtained from third party sources, including industry publications, as well as industry data prepared by our management on the basis of its knowledge of and experience in the industries in which we operate (including our management’s estimates and assumptions relating to such industries based on that knowledge).  Management’s knowledge of such industries has been developed through its experience and participation in these industries.  While our management believes the third party sources referred to in this prospectus are reliable, neither we nor our management have independently verified any of the data from such sources referred to in this prospectus or ascertained the underlying economic assumptions relied upon by such sources.  Internally prepared and third party market forecasts, in particular, are estimates only and may be inaccurate, especially over long periods of time.  In addition, the underwriter has not independently verified any of the industry data prepared by management or ascertained the underlying estimates and assumptions relied upon by management.  Furthermore, references in this prospectus to any publications, reports, surveys or articles prepared by third parties should not be construed as depicting the complete findings of the entire publication, report, survey or article.  The information in any such publication, report, survey or article is not incorporated by reference in this prospectus.
 
PROSPECTUS SUMMARY
 
This summary highlights certain information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including our financial statements and related notes, and especially the risks described under “Risk Factors” beginning at page 12. We note that our actual results and future events may differ significantly based upon a number of factors.  The reader should not put undue reliance on the forward-looking statements in this document, which speak only as of the date on the cover of this prospectus.
 
All references to “we,” “us,” “our,” “CCC,” “Company,” “Registrant” or similar terms used in this prospectus refer to China Commercial Credit, Inc., a Delaware corporation (“CCC”), including its consolidated subsidiaries and variable interest entities (“VIE”), unless the context otherwise requires. We conduct our business through an operating entity, Wujiang Luxiang Rural Microcredit Co., Ltd., a PRC company with limited liability by stock (“Wujiang Luxiang”), which is a VIE controlled by a wholly-owned subsidiary of ours through a series of contractual arrangements.
 
“PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of this prospectus, Taiwan, Hong Kong and Macau. “RMB” or “Renminbi” refers to the legal currency of China and “$”, “US$” or “U.S. Dollars” refers to the legal currency of the United States.
 
 
1

 
 
THE COMPANY
 
General
 
China Commercial Credit, Inc., through its subsidiaries and certain contractual arrangements, controls a microcredit company, Wujiang Luxiang, that provides direct loans and loan guarantee services to small-to-medium sized businesses (“SMEs”), farmers and individuals in the city of Wujiang, Jiangsu Province, China. Jiangsu, which is an eastern coastal province, has among the highest population density in China and is home to many of the world’s leading exporters of electronic equipment, chemicals and textiles. As a result, the city of Wujiang ranks as one of the most economically successful cities in China.
 
The SMEs, both in Jiangsu and other provinces in China, have historically been an under-served segment of the Chinese banking market. Due to the significant demand from SMEs, the number of microcredit companies in China is increasing rapidly. According to the People’s Bank of China (the “PBOC”), there were approximately 5,600 microcredit companies in China with a total outstanding loan balance of over $80 billion as of September 2012.
 
Many SMEs and farmers have been borrowing at high interest rates from “underground” lenders to finance their operations and growth, contrary to the preferences of Chinese banking authorities. Such high interest rate borrowing makes it difficult for businesses to grow, and also exacerbates China’s concerns about inflation. Consequently, in 2008, the China Banking Regulatory Commission (the “CBRC”) and the PBOC issued the 2008 People’s Bank of China Guidance on the Microcredit Company Pilot Yin. Jian. Fa. (2008) (No.23) (“Circular No. 23”) to establish a new type of financial vehicle that would provide microfinance for small borrowers. Pursuant to Circular No. 23 and regulations issued by Jiangsu province, Wujiang Luxiang was established in 2008.
 
The loans and services that we offer bridge the gap between Chinese state-owned and commercial banks that have not traditionally served the capital needs of SMEs and higher interest rate “underground” lenders. We offer loans to meet borrowing needs with fixed interest rates. We also provide guarantees to enable SMEs to obtain loans from third parties. Thanks to the stable relationships we have with local branches of the state-owned and commercial banks and our stable borrower base, we have been generating significant revenue from the interest income we generate from our direct loan and fee income from our guarantee business. In addition, by consistently adhering to our strict underwriting policies, we have been asked to extend less than 5% of our loans.
 
Since Wujiang Luxiang’s inception in October 2008, it has developed a large and growing number of borrowers in Wujiang City. As of December 31, 2012, it has built an $85.8 million portfolio of direct loans to 248 borrowers and guaranteed 145 loans aggregating $86.4 million for 116 borrowers. For the years ended December 31, 2011 and 2012, we generated $10,862,985 and $12,586,724 of net revenue with $8,301,905 and $8,312,469 of net income, respectively.  We strive to optimize every aspect of our operations as we continue to grow our business.  We believe that our management team’s expertise in underwriting loans, combined with a growing borrower base, lays a foundation for our continuing growth.

Business Strategy

We intend to implement two primary strategies to expand and grow the size of our Company: (i) increase our lending capacity through the cash generated from operations and through increase of our registered capital by equity financing and (ii) potential acquisitions of similar microcredit companies in Jiangsu Province, China.
 
 Organic growth will occur through expansion of our direct loan and guarantee services directed at SMEs and farmers. Our existing direct loan and guarantee services could also be expanded by increasing our registered capital base with a portion of the proceeds of this offering or other financing.  The lending capacity of Wujiang Luxiang is limited to the aggregate of its registered capital, any loans it borrows and other funds permitted under PRC laws, such as profits generated from operation and donations, subject to certain statutory reserve deductions required under the PRC laws and regulation. According to a policy named “An Opinion Regarding Further Pushing Forward the Reform of Rural Microcredit Companies,” Su Zheng Ban Fa (2011) No. 8 (“Jiangsu Document No. 8”), the maximum obligation Wujiang Luxiang is allowed to provide guarantees for is three times its net capital. As of December 31, 2012, the registered capital of Wujiang Luxiang was $44,063,863. Under PRC laws, the registered capital refers to the total amount of equity investment made by the shareholders. Once the registered capital is established, it cannot be used for purposes beyond the approved business scope of that entity.  Upon closing of this offering, WFOE will receive the net proceeds of this offering, net of certain expense reserves. WFOE intends to then lend the entire amount of the net proceeds it receives (net of the Expense reserve and the investor relations reserve) to the 12 shareholders of Wujiang Luxiang who will be obligated to contribute such proceeds to Wujiang Luxiang to increase the registered capital of Wujiang Luxiang.  We believe that as our registered capital increases, we will be able to continue to expand our direct loan and guarantee services.  Because our target market has been historically underserved by the state-owned and commercial banks in China, we believe there will be a continuously high demand for our services and we will be able to attract a steady flow of borrowers.
 
 
2

 

Also, we believe that we may have the opportunity to acquire other microcredit companies of similar size and scope in Jiangsu Province, China.  As a result of such acquisitions, we may expand our geographic coverage by obtaining requisite licenses to do business in other cities in Jiangsu province. We intend to actively pursue acquisition opportunities as they arise, although we currently do not have any binding agreement with any acquisition target and there can be no assurance that we will be able to locate any target or negotiate definitive terms with them. In addition, we do not have any arrangement or understanding to acquire other microcredit companies at this time.

Competitive Strengths

We believe there are several key factors that will continue to differentiate us from other microcredit companies in the city of Wujiang.
 
Experienced Management Team.   We have a senior management team that has time-tested, hands-on experience with a high degree of market knowledge and a thorough understanding of the lending industry in China. Mr. Huichun Qin, our CEO and one of the founders of Wujiang Luxiang, worked at the Suzhou Sub-Branch of PBOC from 1981 to 2008, where he served as deputy director of Accounting Finance Section from 1993 to 2006. From 2006 to 2008, Mr. Qin served as the vice president of Wujiang Sub-Branch of PBOC. Mr. Qin also served as a deputy director at the Jiangsu Branch of State Administration of Foreign Exchange (the “SAFE”) from 2006 to 2008.  Other members of our management team have an average of 25 years of previous banking, accounting or other relevant experience. We believe that our management’s significant experience in the lending industry and our efficient underwriting process allow us to more accurately judge to whom to lend to and how to structure the loan.
 
Stable Relationship with State-Owned Banks and Commercial Banks.  We have established relationships with local branches of the state-owned and provincial commercial banks.  We currently have a credit facility agreement with Agricultural Bank of China pursuant to which it extended a line of credit to us, and other state owned banks are interested in extending credit to us. We also have established guarantee cooperation relationships with China Construction Bank, Agricultural Bank of China, Bank of Communications, China CITIC Bank Agriculture Commercial Bank and Jiangsu Bank pursuant to which these banks previously have agreed to accept us as a guarantor for third party loans. Although there is no written understanding between these banks and us with regard to referral of lending business, we believe that the reputation of our management team enables us to maintain and develop good relationships with the local branches of these state owned and commercial banks.
 
Early Entrance and Good Reputation.  We are one of the first microcredit companies approved in the city of Wujiang region. We have strong market recognition among the small borrowers in the city of Wujiang, which we believe should translate into a steady flow of borrowers.
  
Stable Borrower Base. Due to our early entrance that resulted in a sizeable market share, we have been able to retain a stable borrower base with recurring borrowing needs and good repayment track records.
 
We believe we have the following competitive strengths compared to the local branches of state-owned banks and commercial banks which are permitted to extend credit to microcredit companies.
 
Fast Service.  We can close loans more quickly than traditional Chinese banks due to our efficient yet stringent underwriting process and a less bureaucratic environment, which is friendlier to SMEs, farmers and individuals.
 
Favorable Rate to Borrowers with Good Track Records.  We offer favorable rates to borrowers who have a good track record with us, especially to the borrowers who provide real property as collateral.  SMEs appear more willing to establish and maintain good relationship with us than with the local branches of the state-owned and commercial banks who may not be willing to provide as much personalized attention to SMEs.
 
A Greater Willingness to Lend to SMEs. We are focused on providing credit to SMEs, farmers and individuals in the city of Wujiang. With our extensive knowledge and experience working with local SMEs, farmers and individuals, we are better equipped to attract such borrowers and maintain a long-standing relationship with them.
 
 
3

 
 
Corporate Structure

China Commercial Credit, Inc. is a holding company that was incorporated under the laws of the State of Delaware on December 19, 2011. The Company, through its indirect wholly-owned subsidiary, Wujiang Luxiang Information Technology Consulting Co. Ltd. (“WFOE”), a limited liability company formed under the laws of the PRC on September 26, 2012, controls our operating entity, Wujiang Luxiang, a company established under the laws of the PRC on October 21, 2008, through a series of contractual arrangements.  CCC International Investment Ltd. (“CCC BVI”), a company incorporated under the laws of the British Virgin Islands (“BVI”) on August 21, 2012, is wholly owned by the Company.  CCC BVI wholly owns CCC International Investment Holding Ltd. (“CCC HK”), a company incorporated under the laws of the Hong Kong S.A.R. of the PRC on September 4, 2012.  WFOE is wholly owned by CCC HK. 
 
The following diagram illustrates our corporate structure upon completion of this offering:
 
 
Key:  equity ownership   contractual arrangement
 
(1)
Wujiang Luxiang Shareholders include eleven Chinese companies and one Chinese individual, Mr. Huichun Qin, our CEO and Director.
(2)
Pursuant to certain share exchange agreements dated August 7, 2012, 16 PRC individuals exchanged 100% of their equity interests in their respective BVI entities for shares of common stock of CCC. Following the share exchanges, the 16 PRC individuals collectively owned an aggregate of 9,307,373 shares of common stock of CCC and the 16 BVI entities became wholly owned subsidiaries of CCC.  For a detailed discussion of the share exchange transaction, see “Certain Relationship and Related Transactions” beginning on page 67.
(3)
Pursuant to a series of contractual arrangements (“VIE Agreements”), WFOE effectively controls and assumed management of the business activities of Wujiang Luxiang.  A more detailed description of these VIE Agreements is provided under “Business - Our History and Corporate Structure - Contractual Arrangements” on page 47.
 
 
4

 
 
Below are detailed descriptions of each entity involved in our corporate structure.
 
CCC
 
China Commercial Credit, Inc. is a holding company incorporated under the laws of the State of Delaware on December 19, 2011. There are 90 holders of record of CCC’s common stock as of the date of this prospectus.  CCC currently has one director, Mr. Huichun Qin, who is a PRC citizen living in China. There have been no shareholder meetings held since its inception.  As a holding company, CCC does not have nor intends to have substantial operations in the foreseeable future.  CCC has one employee, Mr. Huichun Qin, who was appointed as the CEO and President on August 1, 2012 by the sole director. Mr. Qin entered into an Employment Agreement with CCC on August 1, 2012.
 
On December 19, 2011, CCC issued 691,244 shares of its common stock to its initial shareholder.  On August 7, 2012, CCC, 16 PRC individuals, each of whom is the sole shareholder of a BVI company, and the 16 BVI entities entered into Share Exchange Agreements. The 16 PRC individuals are or represent the ultimate owners of Wujiang Luxiang Shareholders. A form of the Share Exchange Agreement is filed as Exhibit 2.1 to the registration statement of which this prospectus forms a part. The owners of these 16 BVI entities exchanged 100% of their outstanding interest in such companies for an aggregate of 9,307,373 shares of common stock of CCC. Upon consummation of the transactions contemplated in the Share Exchange Agreements (the "Share Exchanges"), the 16 BVI entities became wholly owned subsidiaries of CCC. On August 7, 2012, CCC issued a total of 1,061,290 shares of our Common Stock to an aggregate of 13 investors at the purchase price of $0.001 per share pursuant to certain subscription agreements. A form of the subscription agreement is attached as Exhibit 10.9 to the registration statement of which this prospectus forms a part. Between January 1, 2012 and September 7, 2012, CCC issued a total of 645 shares of Series A Preferred Stock to an aggregate of 11 investors for aggregate consideration of $322,500. Between October 12, 2012 and January 2, 2013, CCC issued a total of 1,280 shares of Series B Preferred Stock to an aggregate of 35 investors for aggregate consideration of $322,000.
 
16 BVI Entities
 
On August 7, 2012, CCC entered into certain share exchange agreements with 16 PRC individuals, each of whom was the sole shareholder of a BVI company, and the 16 BVI entities. These 16 individuals own or represent the owners of the economic interests of the 12 Wujiang Luxiang Shareholders, although none of the 16 BVI entities have any equity interest or economic interest in Wujiang Luxiang.  There is no written or oral voting agreement among the 16 PRC individuals. They do not intend to hold the CCC shares of common stock as a group.  The 16 PRC individuals each have their distinctive voting and dispositive power over the shares of CCC common stock they beneficially own.  Each of the 16 individuals exchanged 100% of their equity interests in their respective BVI entities for certain number of shares of common stock of CCC as shown in the chart under “Certain Relationship and Related Transactions” on page 67.  Upon consummation of the Share Exchanges, the 16 individuals collectively owned an aggregate of 9,307,373 shares of common stock of CCC and each of the 16 BVI entities became a wholly owned subsidiary of CCC.  The only purpose of these 16 BVI entities was to create a method for the 16 PRC individuals to own shares of CCC common stock on their own following consummation of the Share Exchanges.
 
 
5

 
 
None of the 16 BVI entities have any employees.  The chart below shows each of these 16 BVI entities’ date of incorporation, shareholder and director.
 
No.
 
Name of BVI company
 
Date of incorporation
 
Name of Sole  Stockholder and Director
1.
 
Ke Da Investment Ltd.
 
March 8, 2012
 
Ling, Jingen
2.
 
Kai Tong International Ltd.
 
March 8, 2012
 
Cui, Genliang
3.
 
Bao Lin Financial International Ltd.
 
March 8, 2012
 
Song, Qidi
4.
 
Yun Tong International Investment Ltd.
 
March 8, 2012
 
Wu, Jianlin
5.
 
Ding Hui Ltd.
 
March 6, 2012
 
Mo, Lingen
6.
 
Wei Hua International Investment Ltd.
 
March 8, 2012
 
Xu, Weihua
7.
 
Xin Shen International Investment Ltd.
 
March 8, 2012
 
Li, Senlin
8.
 
Tong Ding Ltd.
 
March 6, 2012
 
Shen, Xiaoping
9.
 
Zhong Hui International Investment Ltd
 
March 8, 2012
 
Ling Jinming
10.
 
Candid Finance Ltd.
 
May 21, 2012
 
Jiang, Xueming
11.
 
Heng Ya International Investment Ltd.
 
March 8, 2012
 
Shen Longgen
12.
 
Yu Ji Investment Ltd.
 
March 8, 2012
 
Qin, Huichun
13.
 
Shun Chang Ltd
 
March 6, 2012
 
Pan, Meihua
14.
 
Run Da International Investment Ltd
 
March 8, 2012
 
Ling, Jianferg
15.
 
FuAo Ltd
 
March 8, 2012
 
Ma, Minghua
16.
 
Da Wei Ltd
 
March 8, 2012
 
Wu, Weifang
 
CCC BVI
 
CCC International Investment Ltd (“CCC BVI”) is a company incorporated under the laws of the British Virgin Islands on August 21, 2012 and wholly owned by CCC.  It does not have nor intends to have any substantive operations other than serving as a holding vehicle. The reason for the creation of CCC BVI is to avoid payment of stamp tax if CCC wants to transfer the shares it indirectly owns in CCC HK. The transfer of shares in a Hong Kong entity incurs a 2% stamp tax pursuant to Hong Kong tax laws.  There is no stamp tax payable for transfer of shares in a BVI entity pursuant to BVI tax laws. The current director of CCC BVI is Mr. Huichun Qin who lives in China. CCC BVI currently does not have any employees.
 
CCC HK
 
CCC International Investment Holding Ltd (“CCC HK”) is a company incorporated under the laws of the Hong Kong S.A.R. of the PRC on September 4, 2012 and wholly owned by CCC BVI. It does not have nor intend to have substantive operations other than serving as a holding vehicle.  The reason for the creation of CCC HK is to minimize PRC withholding tax on dividends.  Pursuant to the tax treaty between Hong Kong and mainland China, a withholding tax rate of 5% for distribution of dividends may apply on dividends received by CCC HK if certain requirements under such tax treaty are met, while the withholding tax rate is 10% for dividends to be received by companies incorporated in most other jurisdictions. The current director of CCC HK is Mr. Huichun Qin who lives in China.  CCC HK currently does not have any employees.
 
 
6

 
 
WFOE
 
Wujiang Luxiang Information Technology Consulting Co. Ltd. (“WFOE”) is a limited liability company formed under the laws of the PRC on September 26, 2012. It controls our operating entity, Wujiang Luxiang, through a series of contractual arrangements.  
 
WFOE is wholly owned by CCC HK. The current director of WFOE is Mr. Huichun Qin. WFOE’s only employee is Mr. Huichuan Qin who serves as the president.  WFOE is designed to provide consulting services to Wujiang Luxiang and receive a service fee approximately equal to 100% of Wujiang Luxiang’s net income. WFOE’s current operation is solely to provide such consulting services pursuant to terms of the Exclusive Business Cooperation Agreement attached as Exhibit 10.2 to the registration statement of which this prospectus forms a part.
 
There are no PRC state, provincial or local laws, rules and regulations prohibiting or restricting direct foreign equity ownership in companies engaged in microcredit business. However, the provincial authorities regulate microcredit companies through strict licensing requirements and approval procedures.  Direct controlling foreign ownership in a for-profit microcredit company has never been approved by competent Jiangsu government authorities. Based on the current position taken by the competent Jiangsu government authorities, direct controlling foreign ownership of a for-profit microcredit company will not be approved in the foreseeable future.
 
As such, WFOE has entered into a series of contractual arrangements (“VIE Agreements”) with Wujiang Luxiang and its shareholders.  Pursuant to the VIE Agreements, WFOE effectively assumed management of the business activities of Wujiang Luxiang and has the right to appoint all executives, senior management and the members of the board of directors of Wujiang Luxiang.  The VIE Agreements are comprised of a series of agreements, including an Exclusive Business Cooperation Agreement, Share Pledge Agreement, Exclusive Option Agreement, Power of Attorney and Timely Reporting Agreement, through which the WFOE has the right to advise, consult, manage and operate Wujiang Luxiang in return for a service fee approximately equal to 100% of Wujiang Luxiang’s net income.  All shareholders of Wujiang Luxiang, which include 11 Chinese companies and Mr. Huichun Qin, our Chief Executive Officer and Chairman of the Board (collectively the “Wujiang Shareholders”), have pledged their right, title and equity interests in Wujiang Luxiang as security for the WFOE to collect such service fees from Wujiang Luxiang through a Share Pledge Agreement.  In order to further reinforce WFOE’s rights to control and operate Wujiang Luxiang, the Wujiang Shareholders have granted the WFOE an exclusive right and option to acquire all of their equity interests in Wujiang Luxiang through an Exclusive Option Agreement. Wujiang Luxiang received its business license on October 21, 2008 and currently has the necessary license and permits to conduct its business.  A more detailed description of these VIE Agreements is provided under “Business - Our History and Corporate Structure - Contractual Arrangements” on page 47.  Forms of these VIE Agreements are included as Exhibit 10.2 to 10.6 to the registered statement.
 
 Under the current PRC laws and regulations, we believe that the VIE Agreements are not subject to any government approval except for the Circular No. 75 registration with SAFE and equity interest pledge registration with AIC.  Such approvals are not required because our business does not involve any subject matter that requires government approval. The 16 PRC residents who beneficially own shares in CCC are required to register their ownership with SAFE and have obtained such SAFE registration in November 2012.  The 12 Wujiang Luxiang Shareholders are required to register their equity pledge arrangement as set forth in the Equity Pledge Agreement with AIC.  Such registrations have been completed as of April 15, 2013.  Other than the above two types of registrations, we do not need to obtain any approval from the PRC Ministry of Commerce (“MOFCOM”), China Securities Regulatory Commission (“CSRC”) or other PRC authority prior to publicly listing our securities in the United States.  For a discussion of the risks and uncertainties relating to our corporate structure related to the VIE Agreements, see “Risk Factors” beginning on page 12.
 
 
7

 
 
Wujiang Luxiang
 
Wujiang Luxiang Rural Microcredit Co., Ltd. (“Wujiang Luxiang”) is a company with limited liability by stock established under the laws of the PRC on October 21, 2008.  There are currently eleven entity shareholders and one individual shareholder, Mr. Huichun Qin.  The board of directors of Wujiang Luxiang consists of seven directors, all of whom live in China. There are currently 22 full time employees.  Below are the names of the officers and key employees of Wujiang Luxiang.
 
● 
Huichun Qin - Chief Executive Officer
 
●         
Long Yi - Chief Financial Officer
 
●         
Yao XingLin -  Deputy General Manager
 
●         
Zhong YueMin - Deputy General Manager
 
●         
Zhao  MoSheng - Risk Control Director
 
●         
Zhong HaiYuan  - Board Secretary
 
Wujiang Luxiang is currently our only operating entity. For detailed discussions of Wujiang Luxiang’s operations, see “Business” beginning on page 46.
 
Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting and financial disclosure requirements that are applicable to other public companies, that are not emerging growth companies, including, but not limited to, (1) presenting only two years of audited financial statements and only two years of related management’s discussion & analysis of financial condition and results of operations in this prospectus; (2) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), (3) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and (4) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of these exemptions, and we do not know if investors will find investing in our common stock less attractive as a result.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We elected to opt out of such extended transition period and acknowledge such election is irrevocable pursuant to Section 107 of the JOBS Act.

We could remain an emerging growth company for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (2) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities and Exchange Act of 1934, as amended (“the Exchange Act”), which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months, or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.  Even if we no longer qualify for the exemptions for an emerging growth company, we may still be, in certain circumstances, subject to scaled disclosure requirements as a smaller reporting company. For example, smaller reporting companies, like emerging growth companies, are not required to provide a compensation discussion and analysis under Item 402(b) of Regulation S-K or auditor attestation of internal controls over financial reporting.

Risks Associated With Our Business

Investing in our common stock involves a high degree of risk. Please see the section entitled “Risk Factors” starting on page 12 of this prospectus to read about risks that you should consider carefully before buying shares of our common stock.

Corporate Information

Our principal executive offices are located at No. 1688, Yunli Road, Tongli, Wujiang, Jiangsu Province, China. Our telephone number is (86-0521) 6396-0022. Our agent for service of process is National Registered Agents, Inc. 160 Greentree Drive, Suite 101, Dover, Delaware 19904. Their telephone number is (800) 550-6724. Our website is www.chinacommercialcredit.com. The information on our website is not a part of this prospectus.
 
 
8

 
  
THE OFFERING
 
Securities Being Offered:
 
[______] shares of CCC common stock, plus over-allotment, if any.
     
Initial Offering Price:
 
The purchase price for the shares is between $[___] and [___] per share of common stock.
     
Number of Common Stock Issued and Outstanding Before the Offering:
 
11,520,737 shares of our common stock are issued and outstanding as of the date of this prospectus.
     
Number of Common Stock Issued and Outstanding After the Offering:
 
[___] shares of our common stock will be issued and outstanding after this offering is completed.
     
Use of Proceeds:
 
We intend to use the net proceeds of this offering to increase the registered capital and lending capacity of Wujiang Luxiang and to contribute to the registered capital of WFOE. In the event a strategic acquisition presents itself, including opportunities that can help us promote our business to new borrowers in Jiangsu Province, China, we could use a portion of these proceeds for such acquisition.  In the event that we do not identify any definitive acquisition candidates, we will use such proceeds for working capital and additional lending capacity. For more information on the use of proceeds, see “Use of Proceeds” on page 30.
     
Proposed NASDAQ Symbol:
 
CCCR
     
Risk Factors:
 
Investing in these securities involves a high degree of risk. As an investor you should be able to bear a complete loss of your investment. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 12.
     
Dividend Policy:
 
We declared and paid dividends for the years 2009, 2010 and 2011. We did not declare any dividends for the year 2012. We do not anticipate paying any such dividends for the foreseeable future.
 
 
9

 
 
SUMMARY CONDENSED FINANCIAL DATA
 
The following summary condensed financial data for the fiscal years ended December 31, 2012 and 2011 are derived from the audited consolidated financial statements included elsewhere in this prospectus.  The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.
 
Prospective investors should read these summary condensed financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed financial statements and the related notes included elsewhere in this prospectus.
 
CHINA COMMERCIAL CREDIT, INC.
 
CONSOLIDATED BALANCE SHEETS
 
 
December 31, 2012
 
December 31, 2011
 
ASSETS
           
Cash
  $ 1,588,061     $ 3,549,644  
Restricted cash
    11,595,489       12,443,735  
Loans receivable, net of allowance for loan losses $857,813 and $766,673 for December 31, 2012 and 2011, respectively
    84,923,480       76,022,989  
Due from a related party
    -       235,905  
Interest receivable
    905,454       666,918  
Tax receivable, net
    -       559,277  
Property and equipment, net
    302,626       50,161  
Other assets
    689,709       1,027,800  
Total Assets
  $ 100,004,819     $ 94,556,429  
                 
LIABILITIES AND SHAREHOLDERS’EQUITY
               
LIABILITIES
               
Short-term bank loans
  $ 20,606,791     $ 23,590,469  
Deposits payable
    9,428,061       9,113,229  
Unearned income from financial guarantee services
    773,402       955,047  
Accrual for financial guarantee services
    880,725       887,426  
Tax payable, net
    20,449       -  
Other current liabilities
    742,745       620,029  
Deferred tax liability
    303,567       264,040  
Total Liabilities
  $ 32,755,740     $ 35,430,240  
                 
 
SHAREHOLDERS’ EQUITY
               
Series A Preferred Stock, par value $0.001 per share, 1,000,000 shares authorized, 645 shares outstanding at December 31, 2012
  $ 241,875     $ -  
Series B Preferred Stock, par value $0.001 per share,  5,000,000 shares authorized, 1,280 shares outstanding at December 31, 2012
    240,000       -  
Common stock, par value $0.001 per share, 100,000,000 shares authorized and 11,520,737 and 1,152,074 shares issued and outstanding at December 31, 2012 and December 31, 2011, respectively
    11,521       1,152  
Subscription receivable
    (11,062 )     -  
Additional Paid-in Capital
    43,763,003     $ 44,062,711  
Statutory reserve
    4,232,164       2,967,237  
Retained earnings
    14,558,205       8,353,217  
Accumulated other comprehensive income
    4,213,373       3,741,872  
Total Shareholders’ Equity
    67,249,079       59,126,189  
Total Liabilities and Shareholders’ Equity
  $ 100,004,819     $ 94,556,429  

 
10

 
 
CHINA COMMERCIAL CREDIT, INC.
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
 
For the Years Ended
 
 
December 31, 2012
   
December 31, 2011
 
Interest income
           
Interest and fees on loans
  $ 12,003,158     $ 10,854,752  
Interest and fees on loans-related party
    13,119       72,830  
Interest on deposits with banks
    272,782       248,262  
Total interest and fee income
    12,289,059       11,175,844  
                 
Interest expense
               
Interest expense on short-term bank loans
    (1,298,081 )     (1,237,312 )
Interest expense on short-term borrowings-related party
    -       (346,921 )
Net interest income
    10,990,978       9,591,611  
                 
Provision for loan losses
    (85,035 )     (42,994 )
Net interest income after provision for loan losses
    10,905,943       9,548,617  
                 
Commissions and fees on financial guarantee services
    1,667,067       1,441,942  
Commissions and fees on financial guarantee services – related party
    -       10,297  
Under/(over) provision on financial guarantee services
    13,714       (137,871 )
Commission and fees on guarantee services, net
    1,680,781       1,314,368  
                 
NET REVENUE
    12,586,724       10,862,985  
                 
Non-interest income
               
Government incentive
    188,146       623,345  
Other non-interest income
    135,831       102,487  
Total  non-interest income
    323,977       725,832  
                 
Non-interest expense
               
Salaries and employee surcharge
    (1,052,199 )     (838,572 )
Rental expenses
    (254,921 )     (248,911 )
Business taxes and surcharge
    (472,216 )     (528,286 )
Other operating expense
    (1,111,930 )     (480,587 )
Total non-interest expense
    (2,891,266 )     (2,096,356 )
                 
INCOME BEFORE PROVISION FOR INCOME TAXES
    10,019,435       9,492,461  
Provision for income taxes
    (1,706,966 )     (1,190,556 )
                 
Net Income
    8,312,469       8,301,905  
Other comprehensive income
               
Foreign currency translation adjustment
    471,501       2,163,403  
COMPREHENSIVE INCOME
  $ 8,783,970     $ 10,465,308  

 
11

 
 
RISK FACTORS
 
An investment in our common stock involves a high degree of risks.  You should carefully consider the following material risk factors and other information in this prospectus before deciding to invest in our common stock. If any of the following risks actually occur, our business, financial condition, results of operations and prospects for growth could be seriously harmed. As a result, the trading price, if any, of our common stock could decline and you could lose all or part of your investment.
 
Risks Relating to Our Business
 
Our limited operating history makes it difficult to evaluate our business and prospects.
 
Wujiang Luxiang commenced operations in October 2008 and has a limited operating history. As of December 31, 2012, we have built an $85.8 million portfolio of direct loans to 248 borrowers and have provided a total of $86.4 million in guarantee services for 116 borrowers.  For the years ended December 31, 2011 and 2012, we generated $10,862,985 and $12,586,724 of net revenue with $8,301,905 and $8,312,469 of net income, respectively. However, our growth rate since 2008 may not be indicative of our future performance. We may not be able to achieve similar results or grow at the same rate as we did in the past. It is also difficult to evaluate our prospects, as we may not have sufficient experience in addressing the risks to which companies operating in new and rapidly evolving markets such as the microcredit industry, may be exposed. We will continue to encounter risks and difficulties that companies at a similar stage of development frequently experience, including the potential failure to:

         
obtain sufficient working capital and increase our registered capital to support expansion of our loan portfolio;
         
comply with any changes in the laws and regulations of the PRC or local province that may affect our lending operations;
         
expand our borrowers base;
         
maintain adequate control of default risks and expenses allowing us to realize anticipated revenue growth;
         
implement our customer development, risk management and acquisition strategies and adapt and modify them as needed;
         
integrate any future acquisitions; and
         
anticipate and adapt to changing conditions in the Chinese lending industry resulting from changes in government regulations, mergers and acquisitions involving our competitors, and other significant competitive and market dynamics.

If we are unable to address any or all of the foregoing risks, our business may be materially and adversely affected.

Our current operations in China are territorially limited to the city of Wujiang.

In accordance with the PRC state and provincial laws and regulations with regard to microcredit companies, we are not allowed to make loans and provide guarantees to businesses and individuals located outside of the city of Wujiang.  Our future growth opportunities depend on the growth and stability of the economy in the city of Wujiang. A downturn in the local economy or the implementation of local policies unfavorable to SMEs may cause a decrease in the demand for our loan or guarantee services and may negatively affect borrowers’ ability to repay their loans on a timely basis, both of which could have a negative impact on our profitability and business.
 
If the Jiangsu government subsidy we currently receive from the Jiangsu government for loans to farmers is not renewed, we would suffer a loss of revenues.
 
Pursuant to certain Jiangsu government policies on promotion of rural economic reform, the interest on loans to farmers is subsidized by the government. Therefore, we charge the farmers at a rate lower than that of loans to SME’s. A portion of the difference between the lower rate charged to farmers and the rate charged to SME’s is remitted to us annually by the Jiangsu government as a government subsidy.  We also received other types of government subsidies from Jiangsu government which are, among other things, intended to incentivize microcredit companies to establish and maintain strict financial operation systems. Applicants for these subsidies are required to apply for such subsidies annually.  The standards for granting such subsidy could be flexible and the number of applicants applying for such subsidies varies from year to year. In addition, the amount of funds which will be available for the Jiangsu government to use for these government subsidies each year is uncertain and depend on the needs of microeconomic development of Jiangsu province and the government’s budget.   In the event our application for such subsidy in the future is not granted or the funds we receive are reduced, we would suffer loss of revenues.
 
 
12

 
 
Changes in the interest rates and spread could have a negative impact on our revenues and results of operations.
 
Our revenues and financial condition are dependent on interest income, which is the difference between interest earned from loans we provide and interest paid to the lines of credit we obtain from other financial institutions.  The narrowing interest rate spread could adversely affect our earnings and financial conditions.  If we are not able to control our funding costs or adjust our lending interest rate in a timely manner, our interest margin will decline. In addition, the interest rates we charge to the borrowers in our direct loan business are linked to the PBOC benchmark interest rate (the “PBOC Benchmark Rate”).  The PBOC Benchmark Rate may fluctuate significantly due to changes in the PRC government’s monetary policy.  Due to the restriction that our interest rate cannot be higher than three times the PBOC Benchmark Rate pursuant to certain Jiangsu banking regulations released in October 2012, if we have to reduce the interest rate we charge the borrowers to reflect the decrease of the PBOC Benchmark Rate, we may suffer loss of interest income.
 
As a microcredit company, our business is subject to greater credit risks than larger lenders, which could adversely affect our results of operations.
 
There are inherent risks associated with our lending activities, including credit risk, which is the risk that borrowers may not repay the outstanding loans in our direct loan business or that we may not recover the full amount of the payment we made to the lender in our guarantee business. As a microcredit company, we extend credits to SMEs, farmer and individuals.  These borrowers generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and may have fewer financial resources to weather a downturn in the economy.  Such borrowers may expose us to greater credit risks than lenders lending to larger, better-capitalized state-owned businesses with longer operating histories.  Conditions such as inflation, economic downturn, local policy change, adjustment of industrial structure and other factors beyond our control may increase our credit risk more than such events would affect larger lenders. In addition, we are only permitted to provide financial services to borrowers located in the city of Wujiang, therefore our ability to diversify our economic risks is limited by the local markets and economies.  Also, decreases in local real estate value could adversely affect the value of the real property used as collateral in our direct loan and guarantee business.  Such adverse changes in the local economy may have a negative impact on the ability of borrowers to repay their loans and our results of operations and financial condition may be adversely affected.
 
Our allowance for loan losses may not be sufficient to absorb future losses or prevent a material adverse effect on our business, financial condition, or results of operations.
 
Our risk assessment procedure uses historical information to estimate any potential losses based on our experience, judgment, and expectations regarding our borrowers and the economic environment in which we and our borrowers operate. The allowance for both loan losses and guarantee services were estimated based on 1% of the quarterly outstanding loan and guarantee portfolio balances. We believe we are required to make allowance for loan loss pursuant to “The Guidance on Provisioning for Loan Losses” (the “Provision Guidance”) issued by PBOC and “Financial Practices of Rural Microcredit Companies of Jiangsu Province Pilot” (the “Jiangsu Financial Practices”) issued by Finance Office of Jiangsu Province in 2009. However, our implementation of the measurements set forth in the Provision Guidance and the Jiangsu Financial Practices, especially the Five-Tier approach in making the specific reserve, may be deemed not in compliance with the applicable banking regulations. Our loan loss reserves may not be sufficient to absorb future loan losses or prevent a material adverse effect on our business, financial condition, or results of operations. 

Increase to the allowance for loan losses may cause our net income to decrease.

Our business is subject to fluctuations based on local economic conditions. These fluctuations are not predictable nor within our control and may have a material adverse impact on our operations and financial condition.  We may decide to increase allowance for loan losses in light of the lack of clarity in the applicable banking regulations with regard to microcredit companies.  The regulatory authority may also require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different from those of our management.  Any increase in the allowance for loan losses will result in a decrease in net income and may have a material adverse effect on our financial condition and results of operations.
 
We lack product and business diversification. Accordingly, our future revenues and earnings are more susceptible to fluctuations than a more diversified company.
 
Our primary business activities include offering direct loans and providing guarantee services to our customers. If we are unable to maintain and grow the operating revenues from our business, our future revenues and earnings are not likely to grow and could decline. Our lack of product and business diversification could inhibit the opportunities for growth of our business, revenues and profits.
 
 
13

 

Competition in the microcredit industry is growing and could cause us to lose market share and revenues in the future.
 
We believe that the microcredit industry is an emerging market in China.  We may face growing competition in the microcredit industry and we believe that the microcredit market is becoming more competitive as this industry matures and begins to consolidate. We currently compete with traditional financial institutions, other microcredit companies, and some cash-rich state-owned companies or individuals that lend to SMEs. Some of our competitors have larger and more established borrower bases and substantially greater financial, marketing and other resources than we have. As a result, we could lose market share and our revenues could decline, thereby affecting our earnings and potential for growth.
 
There may be conflicts of interest between Mr. Huichun Qin’s role as the Chairman of the Board and CEO of our company and his role as the chairman of the board of a related entity.

Mr. Qin is the founder of Wujiang Luxiang and has been the Chairman of the Board of Directors and Chief Executive Officer of the Company since January 1, 2013. He is also the chairman of the board and shareholder of Suzhou Rongshengda Investment Holding Co., Ltd. (“Rongshengda”), a PRC limited liability company. Rongshengda is owned by Mr. Qin and 10 PRC companies, all of which are Wujiang Luxiang Shareholders. Rongshengda is in the business of making passive or other investments in early stage businesses. Wujiang Luxiang made certain loans to Rongshengda in 2011 and such loans were repaid in full in November 2011. There may be future transactions between Wujiang Luxiang and Rongshengda. Despite Mr. Qin’s fiduciary duty to us as a director and officer, in the event such conflicts arise, he may not act in our best interests and such conflicts of interest may not be resolved in our favor.
 
Our business depends on the continuing efforts of our management. If we lose their services, our business may be severely disrupted.
 
Our business operations depend on the continuing efforts of our management, particularly the executive officers named in this prospectus. If one or more of our management were unable or unwilling to continue their employment with us, we might not be able to replace them in a timely manner, or at all. We may incur additional expenses to recruit and retain qualified replacements. Our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected. In addition, our management may join a competitor or form a competing company. We may not be able to successfully enforce any contractual rights we have with our management team, in particular in China, where all of these individuals reside and where our business is operated through Wujiang Luxiang through various VIE Agreements. As a result, our business may be negatively affected due to the loss of one or more members of our management.

We require highly qualified personnel and if we are unable to hire or retain qualified personnel, we may not be able to grow effectively.
 
Our future success also depends upon our ability to attract and retain highly qualified personnel. Expansion of our business and our management will require additional managers and employees with industry experience, and our success will be highly dependent on our ability to attract and retain skilled management personnel and other employees. We may not be able to attract or retain highly qualified personnel. Competition for skilled personnel is significant in China. This competition may make it more difficult and expensive to attract, hire and retain qualified managers and employees.

We may have difficulty in establishing adequate management and financial controls in China.

The PRC has only recently begun to adopt the management and financial reporting concepts and practices that investors in the United States are familiar with.  We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are required of a United States public company.  If we cannot establish such controls, or if we are unable to collect the financial data required for the preparation of our financial statements, or if we are unable to keep our books and accounts in accordance with the United States accounting standards for business, we may not be able to continue to file required reports with the Securities and Exchange Commission (the “SEC”), which would likely have a material adverse affect on the performance of our shares of common stock.
 
 
14

 

We do not foresee paying cash dividends in the foreseeable future and, as a result, our investors’ sole source of gain will depend on capital appreciation, if any.

We do not plan to declare or pay any cash dividends on our shares of common stock in the foreseeable future and currently intend to retain any future earnings for funding growth. As a result, investors should not rely on an investment in our securities if they require the investment to produce dividend income. Capital appreciation, if any, of our shares may be investors’ sole source of gain for the foreseeable future.
 
Our bank accounts are not insured or protected against loss.
 
We maintain our cash with various banks located in China. Our cash accounts are not insured or otherwise protected. Should any bank or trust company holding our cash deposits become insolvent, or if we are otherwise unable to withdraw funds, we could lose the cash on deposit with that particular bank or trust company.
 
Risks Relating to Doing Business in China
 
A slowdown of the Chinese economy or adverse changes in economic and political policies of the PRC government could negatively impact China’s overall economic growth, which could materially adversely affect our business.
 
We are a holding company and all of our operations are entirely conducted in the PRC.  Although the PRC economy has grown in recent years, such growth may not continue. A slowdown in overall economic growth, an economic downturn or recession or other adverse economic developments in the PRC may materially reduce the demand for our loan and guarantee services and may have a materially adverse affect on our business.

China’s economy differs from the economies of most other countries in many respects, including the amount of government involvement in the economy, the general level of economic development, growth rates and government control of foreign exchange and the allocation of resources. While the PRC economy has grown significantly over the past few decades, this growth has remained uneven across different periods, regions and economic sectors.
 
The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Any actions and policies adopted by the PRC government could negatively impact the Chinese economy, which could materially adversely affect our business.

Substantial uncertainties and restrictions with respect to the political and economic policies of the PRC government and PRC laws and regulations could have a significant impact upon the business we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition.

Our business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations. Under the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activities and greater economic decentralization.  However, the government of the PRC may not continue to pursue these policies, or may significantly alter these policies from time to time without notice.  

There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of our arrangements with borrowers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. Only after 1979 did the Chinese government begin to promulgate a comprehensive system of laws that regulate economic affairs in general, deal with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, as well as encourage foreign investment in China.  Although the influence of the law has been increasing, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. Also, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. In addition, there have been constant changes and amendments of laws and regulations over the past 30 years in order to keep up with the rapidly changing society and economy in China. Because government agencies and courts provide interpretations of laws and regulations and decide contractual disputes and issues, their inexperience in adjudicating new business and new polices or regulations in certain less developed areas causes uncertainty and may affect our business.  Consequently, we cannot clearly foresee the future direction of Chinese legislative activities with respect to either businesses with foreign investment or the effectiveness on enforcement of laws and regulations in China. The uncertainties, including new laws and regulations and changes of existing laws, as well as judicial interpretation by inexperienced officials in the agencies and courts in certain areas, may cause possible problems to foreign investors.
 
 
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Our microcredit business is subject to extensive regulation and supervision by state, provincial and local government authorities, which may interfere with the way we conduct our business and may negatively impact our financial results.

We are subject to extensive and complex state, provincial and local laws, rules and regulations with regard to our loan and guarantee operations, capital structure, allowance for loan losses, among other things, as set out in the section “Business - Applicable Government Regulations” on page 58 of this prospectus.  These laws, rules and regulations are issued by different central government ministries and departments, provincial and local governments while enforced by different local authorities in the city of Wujiang. In addition, it is not clear whether microcredit companies are subject to certain banking regulations the state-owned and commercial banks are subject to, including the regulation with regard to loan loss reserves. Therefore the interpretation and implementation of such laws, rules and regulations may not be clear and occasionally we have to depend on oral inquiries with local government authorities. As a result of the complexity, uncertainties and constant changes in these laws, rules and regulation, including changes in interpretation and implementation of such, our business activities and growth may be adversely affected if we do not respond to the changes in a timely manner or are found to be in violation of the applicable laws, regulations and policies as a result of a different position from ours taken by the competent authority in the interpretation of such applicable laws, regulations and policies.  If we were found to be not in compliance with these laws and regulations, we may be subject to sanctions by regulatory authorities, monetary penalties and/or reputation damage, which could have a material adverse affect on our business operation and profitability.
 
We may be subject to administrative sanctions in the event the extension we obtained on contribution of WFOE’s registered capital is reversed or determined to be not effective.

Pursuant to Foreign Wholly-Owned Enterprise Law and relevant implementation rules, 15% of the US $10 million registered capital of WFOE is required to be contributed within three months and the remainder be contributed within two years after the business license is granted.  We have not made any contribution within the three month period after WFOE obtained its business license on September 26, 2012 as we do not have sufficient capital resources to make such contribution until this offering is consummated.   We plan on using part of the proceeds from this offering to contribute to the registered capital of WFOE.  Based on our oral inquiries with the local Commission of Commerce of Wujiang, we were told that the competent authority would refrain from taking specific administrative measures against us until June 30, 2013. We believe further extension may be approved in the event this offering is not consummated by then.  In the event such extension is reversed or found to be not valid by a higher authority, we may be subject to administrative sanctions, including monetary penalties and revocation of WFOE registration and its business license by AIC.
 
We may be subject to administrative sanctions in the event we are found to have charged excessive interest rates on some of the historical direct loans we extended.
 
During 2010 and 2011, we provided certain financing consulting services to an aggregate of approximately 50 individuals and companies and generated consulting fees of approximately US$188,733 (RMB 1.2 million). According to the consulting arrangements we had with these parties, we agreed to provide consulting services such as advising on the applicable lending rules and regulations, making recommendations about financing plans, assisting the parties to complete and submit financing applications and providing general guidance in the capital raising process. Some of these clients were also borrowers. We also charged additional consulting fees when such borrowers asked to expedite the review and approval process of their loan applications, as such expedited lendings are extra burdensome to our funding position. The maximum interest rate a microcredit lender is allowed to charge on microcredit loans was four times the PBOC’s Benchmark Rate, according to Circular 23 and Several Opinion Regarding the Trial of Cases promulgated by Supreme Court of PRC. Although none of these loans had interest rates higher than four times the PBOC Benchmark Rate, the aggregate amount of interest we charged such borrower plus the consulting fee would exceed four times the PBOC Benchmark Rate if the consulting fees paid by these borrowers were deemed as additional interest payments. We believe such consulting fees were compensation payments for the consulting services we provided. Also we have stopped providing such consulting services since March 2011 and we do not anticipate engaging in such consulting service in the foreseeable future. However, in the event the competent government authority determines these historical consulting fees were de facto interest payments, we may be found to have charged excessive rates on these loans and, as a result, we may be subject to sanctions by the government authority, which may include return of the excessive interest to affected borrowers, confiscation of illegal gains, fine, suspension of operation and/or revocation of our business license.
 
 
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Investors may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws, including the federal securities laws or other foreign laws against us or our management.
 
All of our operations are conducted in China, and all of our assets are located in China. A majority of our officers are nationals or residents of the PRC and a substantial portion of their assets are located outside the United States. As a result, Dacheng Law Firm, our counsel as to PRC law, has advised us that it may be difficult for a shareholder to effect service of process within the United States upon these persons, or to enforce judgments against us which are obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.
 
Dacheng Law Firm has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws, national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.
 
Dacheng Law Firm has also advised us that in the event that shareholders originate an action against a company without domicile in China for disputes related to contracts or other property interests, the PRC courts may accept a course of action if (a) the disputed contract was concluded or performed in the PRC, or the disputed subject matter is located in the PRC, (b) the company (as defendant) has properties that can be seized within the PRC, (c) the company has a representative organization within the PRC, (d) the parties choose to submit to jurisdiction of the PRC courts in the contract, or (e) the contract is executed or performed within the PRC. The action may be initiated by the shareholder through filing a complaint with the PRC courts. The PRC courts will determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The shareholder may participate in the action by itself or entrust any other person or PRC legal counsel to participate on behalf of such shareholder. Foreign citizens and companies will have the same right as PRC citizens and companies in an action unless such foreign country restricts the rights of PRC citizens and companies.
 
WFOE’s ability to pay dividends to us may be restricted due to foreign exchange control and other regulations of China.

As an offshore holding company, we may rely principally on dividends from our subsidiary in China, WFOE, for our cash requirements, including paying dividends or making other distributions to our shareholders.  Under the applicable PRC laws and regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a foreign-invested enterprise in China is required to set aside a portion of its after-tax profit to fund specific reserve funds prior to payment of dividends. In particular, at least 10% of its after-tax profits based on PRC accounting standards each year is required to be set aside towards its general reserves until the accumulative amount of such reserves reach 50% of its registered capital. These reserves are not distributable as cash dividends.

Furthermore, WFOE’s ability to pay dividends may be restricted due to foreign exchange control policies and the availability of its cash balance. Substantially all of our operations are conducted in China and all of our revenue received, by WFOE through VIE arrangement, are denominated in RMB. RMB is subject to exchange control regulation in China, and, as a result, we may be unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into U.S. Dollars.

The lack of dividends or other payments from WFOE may limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends or otherwise fund, and conduct our business. Our funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash obligations. Accordingly, if we do not receive dividends from WFOE, our liquidity, financial condition and ability to make dividend distributions to our stockholders will be materially and adversely affected.

There is uncertainty in the preferential tax treatment we currently enjoy. Any change in the preferential tax treatment we currently enjoy in the PRC may materially adversely impact our net income.
 
Effective January 1, 2008, the New Enterprise Income Tax Law of PRC stipulates that domestically owned enterprises and foreign invested enterprises (the “FIEs”) are subject to a uniform income tax rate of 25%. While the New Enterprise Income Tax Law equalizes the income tax rates for FIEs and domestically owned enterprises, preferential tax treatment may continue to be given to companies in certain encouraged sectors and to entities classified as high-technology companies, regardless of whether these are domestically-owned enterprises or FIEs. Pursuant to the Jiangsu Document No. 132 issued in November 2009, microcredit companies in Jiangsu Province are subject to a preferential tax rate of 12.5%. As a result, Wujiang Luxiang has been subject to the preferential income tax rate of 12.5% since its inception in 2008. The taxation practice implemented by the tax authority governing our business from 2008 through 2011 was that we paid enterprise income taxes at a rate of 25% on a quarterly basis, and upon annual tax settlement done by the Company and the tax authority within five (5) months after December 31, the tax authority refunded us the excess enterprise income taxes we paid beyond the rate of 12.5% in tax credit. In 2012, the tax authority allowed us to pay enterprise income tax, on a monthly basis, at 12.5% for our income generated from our direct loan business and at 25% for income generated from our guarantee business. In addition, Wujiang Luxiang has been subject to business tax at the preferential rate of 3% since its inception in 2008.
 
 
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In April 2012 Wujiang Luxiang received a notice from local tax authority, informing us that only income generated from Wujiang Luxiang’s direct loan business was qualified to enjoy a preferential income tax rate of 12.5% and business tax of 3% under the Jiangsu Document 132, but its taxable income arising from the guarantee business was still subject to a standard tax rate of 25% for income tax and 5% for business tax. Local tax authority required Wujiang Luxiang to implement the above-mentioned policy starting with the tax filing for 2011 which was filed in April 2012, and the policy applies to all years thereafter.  The impact of the changed policy on the income tax provision on the issued financial statements of 2011 was $220,032.  However, we believe the underpayment was comparatively minimal as it only accounted for less than 3% of net income of 2011, thus it recorded the underpayment of $220,032 in the financial statements for financial year of 2012. There is no underpayment penalty assessed.

There is a risk that the competent tax authority may decide that Wujiang Luxiang will not be eligible for the preferential tax rates for the direct loan business in the future. Moreover, the PRC government could eliminate any of these preferential tax treatments before their scheduled expiration. Expiration, reduction or elimination of such preferential tax treatments will increase our income tax expenses and in turn decrease our net income.
 
There is uncertainty in the policy at the state and provincial levels as to how the direct loan and guarantee businesses carried out by the microcredit companies shall be treated with regard to income tax and business tax.   If the tax authority determines that the income tax, business tax or other applicable tax we previously paid were less than what was required, we may be requested to make payment for the overdue tax and interest on the overdue payment.
 
Our global income may be subject to PRC taxes under the PRC Enterprise Income Tax Law, which could have a material adverse effect on our results of operations.

Under the PRC Enterprise Income Tax Law, or the New EIT Law, and its implementation rules, which became effective in January 2008, an enterprise established outside of the PRC with a “de facto management body” located within the PRC is considered a PRC resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel and human resources, finance and treasury, and acquisition and disposition of properties and other assets of an enterprise.” On April 22, 2009, the State Administration of Taxation, or the SAT, issued a circular, or SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although the SAT Circular 82 only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the determining criteria set forth in the SAT Circular 82 may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the resident status of all offshore enterprises for the purpose of PRC tax, regardless of whether they are controlled by PRC enterprises or individuals. Although we do not believe that our legal entities organized outside of the PRC constitute PRC resident enterprises, it is possible that the PRC tax authorities could reach a different conclusion. In such case, we may be considered a PRC resident enterprise and may therefore be subject to the 25% enterprise income tax on our global income. If we are considered a resident enterprise and earn income other than dividends from our PRC subsidiary, a 25% enterprise income tax on our global income could significantly increase our tax burden and materially and adversely affect our cash flow and profitability. In addition to the uncertainty regarding how the new PRC resident enterprise classification for tax purposes may apply, it is also possible that the rules may change in the future, possibly with retroactive effect.

Fluctuations in the foreign currency exchange rate between U.S. Dollars and Renminbi could adversely affect our financial condition.

The value of the RMB against the U.S. dollar and other currencies may fluctuate. Exchange rates are affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and managed band against a basket of foreign currencies. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the U.S. dollar over three years. From July 2008 until June 2010, however, the RMB traded stably within a narrow range against the U.S. dollar. There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in a further and more significant appreciation of the RMB against foreign currencies. On June 20, 2010, the PBOC announced that the PRC government would reform the RMB exchange rate regime and increase the flexibility of the exchange rate. We cannot predict how this new policy will impact the RMB exchange rate. 
 
 
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Our revenues and costs are mostly denominated in the RMB, and a significant portion of our financial assets are also denominated in the RMB. Any significant fluctuations in the exchange rate between the RMB and the U.S. dollar may materially adversely affect our cash flows, revenues, earnings and financial position, and the amount of and any dividends we may pay on our common stock in U.S. dollars. In addition, any fluctuations in the exchange rate between the RMB and the U.S. dollar could also result in foreign currency translation losses for financial reporting purposes.

Future inflation in China may inhibit economic activity and adversely affect our operations.
 
The Chinese economy has experienced periods of rapid expansion in recent years which can lead to high rates of inflation or deflation.  This has caused the PRC government to, from time to time, enact various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation.  High inflation may in the future cause the PRC government to once again impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China.  Any action on the part of the PRC government that seeks to control credit and/or prices may adversely affect our business operations.

PRC laws and regulations have established more complex procedures for certain acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.
 
Further to the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rules, the Anti-monopoly Law of the PRC, the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM or the MOFCOM Security Review Rules, was issued in August 2011, which established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time-consuming and complex, including requirements in some instances that MOFCOM be notified in advance of any change of control transaction in which a foreign investor takes control of a PRC enterprise, or that the approval from MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review and or security review.
 
The MOFCOM Security Review Rules, effective from September 1, 2011, which implement the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, further provide that, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review by MOFCOM, the principle of substance over form should be applied and foreign investors are prohibited from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions.
 
Further, if the business of any target company that we plan to acquire falls into the scope of security review, we may not be able to successfully acquire such company either by equity or asset acquisition, capital contribution or through any contractual arrangement. We may grow our business in part by acquiring other companies operating in our industry. Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
 
PRC regulation of loans to, and direct investments in, PRC entities by offshore holding companies may delay or prevent us from using the proceeds of our initial public offering or other financing activities to make loans or capital increase contributions to our PRC operating subsidiaries, which could materially adversely affect our liquidity and ability to fund and expand our business.
 
In utilizing the proceeds from this initial public offering or in other future financing activities, as an offshore holding company with PRC subsidiaries, we may transfer funds to our PRC subsidiaries or finance our operating entity by means of shareholder’s loans or capital contributions. Any loans to our PRC subsidiaries, which are foreign-invested enterprises, cannot exceed statutory limits based on the difference between the amount of our investments and registered capital in such subsidiaries, and shall be registered with SAFE, or its local counterparts. Furthermore, any capital increase contributions we make to our PRC subsidiaries, which are foreign-invested enterprises, shall be approved by MOFCOM, or its local counterparts. We may not be able to obtain these government registrations or approvals on a timely basis, if at all. If we fail to receive such registrations or approvals, our ability to provide loans or capital increase contributions to our PRC subsidiaries may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.
 
 
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In addition, SAFE promulgated the Circular on the Relevant Operating Issues concerning Administration Improvement of Payment and Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or Circular 142, on August 29, 2008. Its subsequent Supplementary Notice on Issues Relating to the Improvement of Business Operations over Payment and Settlement of Foreign Exchange Capital of Foreign-Invested Enterprises was promulgated by SAFE on July 18, 2011. Under Circular 142, registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used within the business scope approved by the applicable governmental authority and may not be used for equity investments in the PRC. In addition, foreign-invested companies may not change how they use such capital without SAFE’s approval, and may not in any case use such capital to repay RMB loans if they have not used the proceeds of such loans according to the loan agreement. Furthermore, SAFE promulgated a circular on November 19, 2010, or Circular 59, as amended in April, 2012, which requires the authenticity of settlement of net proceeds from offshore offerings to be closely examined and the net proceeds to be settled in the manner described in the offering documents. Circular 142 and Circular 59 may significantly limit our ability to transfer the net proceeds from our initial public offering to our PRC subsidiaries and convert the net proceeds into RMB, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

As our ultimate holding Company is a Delaware corporation, we are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur from time-to-time in the PRC  Our employees or other agents may unfortunately engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
 
Recent SEC’s administrative proceedings against the China affiliates of the five multi-national accounting firms may lead to the deregistering of Chinese accounting firms by the PCAOB, which may affect our ability to engage qualified independent auditors.
 
The SEC recently commenced administrative proceedings against BDO China Dahua Co. Ltd., Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Fund) and PricewaterhouseCoopers Zhong Tian CPAs Limited for refusing to produce audit work papers and other documents related to PRC-based companies under investigation by the SEC for potential accounting fraud against U.S. investors.  The SEC has launched an initiative to address concerns arising from reverse mergers and foreign issuers.  The SEC charged these accounting firms with violations of the Securities Exchange Act and the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide, upon the request of the SEC, audit work papers involving any company trading on U.S. markets.  Under PRC law, auditors are not permitted to hand over audit work papers as books and records of Chinese companies are afforded protection of secrecy laws.   We are not in a position to assess the outcome or ramifications of these ongoing proceedings and investigations.  Unless the PRC government changes its secrecy laws, there are risks that the Public Company Accounting Oversight Board (“PCAOB”) may deregister Chinese accounting firms whose audit work papers the PCAOB cannot inspect and such deregistering of Chinese accounting firms by the PCAOB would, in turn, make it difficult for us to engage qualified independent auditors.
 
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matter which could harm our business operations, this offering and our reputation and could result in a loss of your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
 
Recently, U.S. public companies that have substantially all of their operations in China, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company, our business and this offering. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation may distract our management from growing our company. If such allegations are not proven to be groundless, our company and business operations will be severely hampered and your investment in our stock could be rendered worthless.
 
 
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The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies in the PRC. 
 
Upon consummating of this offering, we will be regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated by the SEC under the Securities Act and the Exchange Act. Our SEC filings and other disclosure and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports and other filings are not subject to the review by CSRC, a PRC regulator that is tasked with oversight of the capital markets in China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done any review of our company, our SEC reports, other filings or any of our other public pronouncements.
 
  Risks Related to Our Corporate Structure
 
We conduct our business through Wujiang Luxiang by means of contractual arrangements. If the Chinese government determines that these contractual arrangements do not comply with applicable regulations, we could be subject to severe penalties and our business could be adversely affected. In addition, changes in such Chinese laws and regulations may materially and adversely affect our business.

There are uncertainties regarding the interpretation and application of PRC laws, rules and regulations, including but not limited to the laws, rules and regulations governing the validity and enforcement of the contractual arrangements between WFOE and Wujiang Luxiang.    Although we have been advised by our PRC counsel, Dacheng Law Firm, that based on their understanding of the current PRC laws, rules and regulations, the structure for operating our business in China (including our corporate structure and contractual arrangements with Wujiang Luxiang and its shareholders) comply with all applicable PRC laws, rules and regulations, and do not violate, breach, contravene or otherwise conflict with any applicable PRC laws, rules or regulations, the PRC regulatory authorities may determine that our corporate structure and contractual arrangements violate PRC laws, rules or regulations. If the PRC regulatory authorities determine that our contractual arrangements are in violation of applicable PRC laws, rules or regulations, our contractual arrangements will become invalid or unenforceable.

If WFOE, Wujiang Luxiang, or their ownership structure or the contractual arrangements, are determined to be in violation of any existing or future PRC laws, rules or regulations, or WFOE or Wujiang Luxiang fails to obtain or maintain any of the required governmental permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including:

revoking the business and operating licenses of WFOE or Wujiang Luxiang;

discontinuing or restricting the operations of WFOE or Wujiang Luxiang;

imposing conditions or requirements with which we, WFOE or Wujiang Luxiang may not be able to comply;

requiring us, WFOE or Wujiang Luxiang to restructure the relevant ownership structure or operations;

restricting or prohibiting our use of the proceeds from our initial public offering to finance our business and operations in China; or

imposing fines.
 
The imposition of any of these penalties would severely disrupt our ability to conduct business and have a material adverse effect on our financial condition, results of operations and prospects.
 
Under the PRC Property Rights Law that became effective on October 1, 2007, we are required to register with the relevant government authority the security interests on the equity interests in Wujiang Luxiang granted to us under the Share Pledge Agreements that are part of the contractual arrangements. We intend to use our best efforts to complete such registration. However, failure to complete such registration may result in such equity pledge rights not coming into effect until the registration has been duly completed. In addition, new PRC laws, rules and regulations may be introduced from time to time to impose additional requirements that may be applicable to our contractual arrangements.
 
 
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On or around September 2011, various media sources reported that the China Securities Regulatory Commission (the “CSRC”) had prepared a report proposing pre-approval by a competent central government authority of offshore listings by China-based companies with variable interest entity structures, such as ours, that operate in industry sectors subject to foreign investment restrictions. However, it is unclear whether the CSRC officially issued or submitted such a report to a higher level government authority or what any such report provides, or whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or what they would provide. If our ownership structure, contractual arrangements or businesses of Wujiang Luxiang are found to be in violation of any existing or future PRC laws or regulations, the relevant governmental authorities, including the CSRC, would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of Wujiang Luxiang, revoking the business licenses or operating licenses of Wujiang Luxiang, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from this offering to finance our business and operations in China, and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations.

Our contractual arrangements with Wujiang Luxiang may not be effective in providing control over Wujiang Luxiang.

All of our revenue and net income is derived from Wujiang Luxiang. According to our inquiries with Jiangsu provincial authorities, provincial foreign equity ownership in companies engaged in microcredit services in Jiangsu Province has never been approved and such position will not change in the foreseeable future.  Therefore, we do not intend to have an equity ownership interest in Wujiang Luxiang but rely on contractual arrangements with Wujiang Luxiang to control and operate its business.   However, these contractual arrangements may not be effective in providing us with the necessary control over Wujiang Luxiang and its operations.  Any deficiency in these contractual arrangements may result in our loss of control over the management and operations of Wujiang Luxiang, which will result in a significant loss in the value of an investment in our Company. Because of the practical restrictions on direct foreign equity ownership imposed by the Jiangsu provincial government authorities, we must rely on contractual rights through our VIE structure to effect control over and management of Wujiang Luxiang, which exposes us to the risk of potential breach of contract by the shareholders of Wujiang Luxiang. In addition, as Wujiang Luxiang is jointly owned by its shareholders, it may be difficult for us to change our corporate structure if such shareholders refuse to cooperate with us.

The failure to comply with PRC regulations relating to mergers and acquisitions of domestic enterprises by offshore special purpose vehicles may subject us to severe fines or penalties and create other regulatory uncertainties regarding our corporate structure.
 
On August 8, 2006, MOFCOM, joined by the CSRC, the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration of Taxation (the “SAT”), the State Administration for Industry and Commerce (the “SAIC”), and SAFE, jointly promulgated regulations entitled the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the "M&A Rules"), which took effect as of September 8, 2006, and as amended on June 22, 2009. This regulation, among other things, has certain provisions that require offshore special purpose vehicles formed for the purpose of acquiring PRC domestic companies and controlled directly or indirectly by PRC individuals and companies, to obtain the approval of MOFCOM prior to engaging in such acquisitions and to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock market. On September 21, 2006, the CSRC published on its official website a notice specifying the documents and materials that are required to be submitted for obtaining CSRC approval.
 
The application of the M&A Rules with respect to our corporate structure and to this offering remains unclear, with no current consensus existing among leading PRC law firms regarding the scope and applicability of the M&A Rules. We believe that the MOFCOM and CSRC approvals under the M&A Rules were not required in the context of our share exchange transaction because at such time the share exchange was a foreign related transaction governed by foreign laws, not subject to the jurisdiction of PRC laws and regulations. However, we cannot be certain that the relevant PRC government agencies, including the CSRC and MOFCOM, would reach the same conclusion, and we cannot be certain that MOFCOM or the CSRC will not deem that the transactions effected by the share exchange circumvented the M&A Rules, and other rules and notices, or that prior MOFCOM or CSRC approval is required for this offering. Further, we cannot rule out the possibility that the relevant PRC government agencies, including MOFCOM, would deem that the M&A Rules required us or our entities in China to obtain approval from MOFCOM or other PRC regulatory agencies in connection with WFOE’s control of Wujiang Luxiang through contractual arrangements.
 
 
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If the CSRC, MOFCOM, or another PRC regulatory agency subsequently determines that CSRC, MOFCOM or other approval was required for the share exchange transaction and/ or the VIE arrangements between WFOE and Wujiang Luxiang, or if prior CSRC approval for this offering is required and not obtained, we may face severe regulatory actions or other sanctions from MOFCOM, the CSRC or other PRC regulatory agencies. In such event, these regulatory agencies may impose fines or other penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our common stock. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to delay or cancel this offering, to restructure our current corporate structure, or to seek regulatory approvals that may be difficult or costly to obtain.
 
The M&A Rules, along with certain foreign exchange regulations discussed below, will be interpreted or implemented by the relevant government authorities in connection with our future offshore financings or acquisitions, and we cannot predict how they will affect our acquisition strategy. For example, Wujiang Luxiang’s ability to remit its profits to us, or to engage in foreign-currency-denominated borrowings, may be conditioned upon compliance with the SAFE registration requirements by such Chinese domestic residents, over whom we may have no control.

SAFE regulations relating to offshore investment activities by PRC residents may increase our administrative burdens and restrict our overseas and cross-border investment activity. If our shareholders and beneficial owners who are PRC residents fail to make any required applications, registrations and filings under such regulations, we may be unable to distribute profits and may become subject to liability under PRC laws.
 
SAFE has promulgated several regulations, including Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Overseas Special Purpose Vehicles ("Circular No. 75"), issued on October 21, 2005 and effective as of November 1, 2005 and certain implementation rules issued in recent years, requiring registrations with, and approvals from, PRC government authorities in connection with direct or indirect offshore investment activities by PRC residents and PRC corporate entities. These regulations apply to our shareholders and beneficial owners who are PRC residents, and may affect any offshore acquisitions that we make in the future.
 
SAFE Circular No. 75 requires PRC residents, including both PRC legal person residents and/or natural person residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of equity financing with assets or equities of PRC companies, referred to in the notice as an "offshore special purpose company." In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to update his registration with the relevant SAFE branches, with respect to that offshore company, in connection with any material change involving an increase or decrease of capital, transfer or swap of shares, merger, division, equity or debt investment or creation of any security interest. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liabilities for such PRC subsidiary under PRC laws for evasion of applicable foreign exchange restrictions.

In May 2011, SAFE issued the Notice of SAFE on Printing and Distribution the Implementing Rules for the Administration of Foreign Exchange in Fund-Raising and Round-trip Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or Circular No. 19, which came into effect as of July 1, 2011 to its local branches with respect to the operational process for SAFE registration. The guidance standardized more specific and stringent supervision on the registration required by the Circular 75. For example, the guidance imposes obligations on onshore subsidiaries of an offshore entity to make true and accurate statements to the local SAFE authorities in case there is any shareholder or beneficial owner of the offshore entity who is a PRC citizen or resident. Untrue statements by the onshore subsidiaries will be subject to administrative penalties under PRC foreign administration regulations.

In addition to the disclosure obligation, the PRC onshore subsidiaries indirectly invested by a PRC resident through that offshore company are required to coordinate and supervise the filing of SAFE registrations by the offshore company's shareholders who are PRC residents in a timely manner. If a PRC shareholder with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, such PRC resident will be subject to administrative penalties under PRC foreign administration regulations, including fines.
 
In order for WFOE to make distribution or pay dividends to its sole shareholder, CCC HK, WFOE is required to complete certain procedures with SAFE, including obtaining a certificate of tax completion evidencing withholding of capital gain tax and submitting an application of foreign exchange to a local bank designated by local SAFE. From our knowledge of the procedures of local banks, the local bank will review all the necessary SAFE registrations, including registration pursuant to Circular No. 75 and Circular No. 7 (as defined below) before they approve the foreign exchange application.
 
 
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Although we have requested our PRC shareholders to complete the SAFE Circular No. 75 registration, we cannot be certain that all of our PRC resident beneficial owners will comply with the SAFE regulations. The failure or inability of our PRC shareholders to receive any required approvals or make any required registrations may subject us to fines and legal sanctions, restrict our overseas or cross-border investment activities, prevent us from transferring the net proceeds of this offering or making other capital injection into our PRC affiliates, limit our PRC affiliates' ability to make distributions or pay dividends or affect our ownership structure, as a result of which our acquisition strategy and business operations and our ability to distribute profits to you could be materially and adversely affected.
 
Under Notice of the SAFE on Issues Related to Foreign Exchange Administration in Domestic Individual’s Participation in Equity Incentive Plans of Companies listed Aboard (Hui Fa (2012) No. 7), issued and effective as of February 15, 2012 by SAFE ("Circular No. 7"), SAFE requires PRC residents who are granted shares or share options by an overseas-listed company under such company’s employee share option or share incentive plan, through such company’s PRC subsidiary or branch located in the PRC, any other PRC entity that is under control of such company or other qualified PRC agents, or collectively the PRC agent, to register with SAFE and complete certain other procedures related to the share option or other share incentive plan and to open a special foreign currency account and to use such account to pay for funds required for exercising the option and to receive overseas share sale proceeds in foreign exchange and to distribute such proceeds to relevant employees in US dollars or in RMB after conversion. More specifically, the PRC agent can also apply for the annual quota of currency conversion to convert overseas share sale proceeds in US dollars into RMB. In addition, an offshore entity must be appointed to act as trustee to handle share transfer transactions or option exercises relating to the share option or other share incentive plan. We believe that all of our PRC employees who are granted share options are subject to Circular No. 7. If we grant our PRC employees stock options, we will request our PRC management, personnel, directors and employees who are to be granted stock options to register them with local SAFE pursuant to Circular No. 7. However, each of these individuals may not successfully comply with all the required procedures above. If we or our PRC security holders fail to comply with these regulations, we or our PRC security holders may be subject to fines and legal sanctions. Further, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for foreign exchange evasion and we may become subject to a more stringent review and approval process with respect to our foreign exchange activities.
 
Our agreements with Wujiang Luxiang are governed by the laws of the PRC and we may have difficulty in enforcing any rights we may have under these contractual arrangements.
 
As all of our contractual arrangements with Wujiang Luxiang are governed by the PRC laws and provide for the resolution of disputes through arbitration in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in the United States. As a result, uncertainties in the PRC legal system could further limit our ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over Wujiang Luxiang, and our ability to conduct our business may be materially and adversely affected.
 
The Wujiang Luxiang shareholders have potential conflicts of interest with us, which may adversely affect our business.

All ultimate individual shareholders of the 11 Chinese entities and Mr. Huichun Qin, which collectively own 100% of Wujiang Luxiang’s outstanding equity interests, are beneficial owners of shares of common stock of CCC. Equity interests held by each of these shareholders in CCC is less than its interest in Wujiang Luxiang as a result of our introduction of outside investors as shareholders of CCC. In addition, such shareholders’ equity interest in our company will be further diluted as a result of this offering as well as any future offering of equity securities. As a result, conflicts of interest may arise as a result of such dual shareholding and governance structure.

If such conflicts arise, these shareholders may not act in our best interests and such conflicts of interest may not be resolved in our favor. In addition, these shareholders may breach or cause Wujiang Luxiang to breach or refuse to renew the VIE Agreements that allow us to exercise effective control over Wujiang Luxiang and to receive economic benefits from Wujiang Luxiang. Delaware laws provide that directors owe a fiduciary duty to the company, which requires them to act in good faith and in the best interests of the company and not to use their positions for personal gain. If Huichun Qin, who is one of the shareholders of Wujiang Luxiang and the Chairman of Board of our company, does not comply with his fiduciary duties to us as a director, or if we cannot resolve any conflicts of interest or disputes between us and such shareholders or any future beneficial owners of Wujiang Luxiang, we would have to rely on arbitral or legal proceedings to remedy the situation. Such arbitral and legal proceedings may cost us substantial financial and other resources and result in disruption of our business, and the outcome may not be in our favor.
 
 
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If Wujiang Luxiang fails to maintain the requisite registered capital, licenses and approvals required under PRC law, our business, financial condition and results of operations may be materially and adversely affected.

Foreign investment is highly regulated by the PRC government and the foreign investment in the lending industry is restricted by local authorities. Numerous regulatory authorities of the central PRC government and local authorities are empowered to issue and implement regulations governing various aspects of the lending industry. Wujiang Luxiang is required to obtain and maintain certain assets relevant to its business as well as applicable licenses or approvals from different regulatory authorities in order to provide their current services. These registered capital and licenses are essential to the operation of our business and are generally subject to annual review by the relevant governmental authorities. Furthermore, Wujiang Luxiang may be required to obtain additional licenses. If we fail to obtain or maintain any of the required registered capital, licenses or approvals, our continued business operations in the lending industry may subject to various penalties, such as confiscation of illegal net revenue, fines and the discontinuation or restriction of our operations. Any such disruption in the business operations of Wujiang Luxiang will materially and adversely affect our business, financial condition and results of operations.

 
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Risks Relating to This Offering and Our Securities
 
There has been no public market for our common stock prior to this offering, and you may not be able to resell our common stock at or above the price you paid, or at all.
 
                   Prior to this initial public offering, there has been no public market for our common stock. We intend to apply to have our common stock listed on NASDAQ.  If an active trading market for our common stock does not develop after this offering, the market price and liquidity of our common stock will be materially adversely affected. The initial public offering price for our common stock will be determined by negotiations between us and the underwriters and may bear little or no relationship to the market price for our common stock after the initial public offering. An active trading market for our common stock may not develop and the market price of our common stock may decline below the initial public offering price. You may not be able to sell any shares of common stock that you purchase in the offering at or above the initial public offering price.  Accordingly, investors should be prepared to face a complete loss of their investment.

Our common stock may be thinly traded and you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.

After our common stock begins trading on NASDAQ, our common stock may be “thinly-traded”, meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent.  This situation may be attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned.  As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price.  Broad or active public trading market for our common stock may not develop or be sustained.

Because our initial public offering per share price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase common stock in this offering, you will pay more for your common stock than the amount paid by our existing shareholders on a per share basis.  As a result, you will experience immediate and substantial dilution of approximately US$ [  ] per share, representing the difference between the amount per share paid by purchasers of shares in this offering and the net tangible book value per share of common stock immediately after completion of this offering, after giving effect to the automatic conversion of the Series A and Series B Preferred Stock at the completion of this offering. In addition, you will experience further dilution to the extent that additional shares are issued upon exercise of over-allotment options.

The application of the “penny stock” rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.

In the event our common stock is not listed on NASDAQ after the completion of this offering and the trading price of our common shares is below $5.00 per share, we could be deemed a “penny stock” company and the open-market trading of our common shares could be subject to the “penny stock” rules. The “penny stock” rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established borrowers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser’s written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common stock, and may result in decreased liquidity for our common stock and increased transaction costs for sales and purchases of our common stock as compared to other securities. 
 
 
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The market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses.
  
The market price for our common stock may be volatile.
 
The market price for our common stock may be volatile and subject to wide fluctuations due to factors such as:
 
 
 ●
the perception of US investors and regulators of US-listed Chinese companies;
 
 
 ●
actual or anticipated fluctuations in our quarterly operating results;
 
 
 ●
changes in financial estimates by securities research analysts;
 
 
 
 
 ●
negative publicity, studies or reports;
 
 
 
 
 ●
conditions in Chinese credit markets;
 
 
 ●
changes in the economic performance or market valuations of other microcredit companies;
 
 
 ●
announcements by us or our competitors of acquisitions, strategic partnerships, joint ventures or capital commitments;
 
 
 ●
addition or departure of key personnel;
  
 
 ●
fluctuations of exchange rates between RMB and the U.S. dollar; and
 
 
 ●
general economic or political conditions in China.
 
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies.  These market fluctuations may also materially and adversely affect the market price of our common stock.

Volatility in our common stock price may subject us to securities litigation.

The market for our common stock may have, when compared to seasoned issuers, significant price volatility and we expect that our share price may continue to be more volatile than that of a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in the section entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities. These investments may not yield a favorable return to our shareholders.

As an “emerging growth company” under applicable law, we will be subject to lessened disclosure requirements. Such reduced disclosure may make our common stock less attractive to investors.

For as long as we remain an “emerging growth company” as defined in the JOBS Act, we will elect to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies”, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.  Because of these lessened regulatory requirements, our stockholders would be left without information or rights available to stockholders of more mature companies. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
 
 
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Our status as an “emerging growth company” under the JOBS Act may make it more difficult to raise capital when we need to do it.

Because of the exemptions from various reporting requirements provided to us as an “emerging growth company”, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it.  If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
 
We will incur increased costs and demands upon management as a result of complying with the laws and regulations that affect public companies, which could materially adversely affect our results of operations, financial condition, business and prospects.

As a public company and particularly after we cease to be an “emerging growth company,” we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with Section 404(b) and other provisions of the Sarbanes-Oxley Act, as well as Section 14 rules implemented by the SEC and NASDAQ. In addition, our management team will also have to adapt to the requirements of being a public company. We expect that compliance with these rules and regulations will substantially increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

The increased costs associated with operating as a public company will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our results of operations, financial condition, business and prospects.

We are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
 
We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for fiscal 2014, the first fiscal year beginning after our IPO. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting and, after we cease to be an “emerging growth company,” a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting.
 
We are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective.
 
If we are unable to assert that our internal control over financial reporting is effective, or if, when required, our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC.
  
We will be required to disclose changes made in our internal controls and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company” as defined in the JOBS Act, if we take advantage of the exemptions contained in the JOBS Act. We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any July 31 before that time, our revenues exceed $1 billion, or we issue more than $1 billion in non-convertible debt in a three year period, we would cease to be an “emerging growth company” as of the following January 31. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.
 
 
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Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an “emerging growth company.” At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.
 
Provisions in our By-lawsand Delaware laws might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.
 
Provisions of our by-laws and Delaware laws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include: 
 
 
 ●
the inability of stockholders to act by written consent or to call special meetings;
 
 
 ●
the ability of our board of directors to make, alter or repeal our by-laws; and
 
 
 ●
the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.
 
In addition, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested stockholder, unless such transactions are approved by our board of directors. The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

The elimination of monetary liability against our directors, officers and employees under our certificate of incorporation and the existence of indemnification of our directors, officers and employees under Delaware law may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
 
Our certificate of incorporation contains provisions which eliminate the liability of our directors for monetary damages to us and our stockholders to the maximum extent permitted under the corporate laws of Delaware. We may also provide contractual indemnification obligations under agreements with our directors, officers and employees. These indemnification obligations could result in our incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers and employees, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against directors, officers and employees for breach of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors, officers and employees even though such actions, if successful, might otherwise benefit the Company and our shareholders.

Neither management nor the underwriters have performed due diligence on market and industry data cited in this prospectus.

This prospectus includes market and industry data that has been obtained from third party sources, including industry publications, as well as industry data prepared by our management on the basis of its knowledge of and experience in the industries in which we operate (including our management’s estimates and assumptions relating to such industries based on that knowledge).  Management’s knowledge of such industries has been developed through its experience and participation in these industries.  Neither we nor our management have conducted due diligence or independently verified any of the data from such sources referred to in this prospectus or ascertained the underlying economic assumptions relied upon by such sources.  Internally prepared and third party market forecasts, in particular, are estimates only and may be inaccurate, especially over long periods of time.  In addition, the underwriter has not independently verified any of the industry data prepared by management or ascertained the underlying estimates and assumptions relied upon by management.  Furthermore, references in this prospectus to any publications, reports, surveys or articles prepared by third parties should not be construed as depicting the complete findings of the entire publication, report, survey or article.  If such market and industry data turned out to be inaccurate, management’s belief and perception of our competitive strength may need to be adjusted and, as  a result, our business strategy may need to be changed which may have a negative effect on our results of operations.

 
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USE OF PROCEEDS

Based on the offering price of $[___], which is the midpoint of our estimated offering price range, we estimate that the net proceeds from the sale of the [_____] shares in the offering will be approximately $[___] after deducting the estimated underwriting discounts and commissions of __% and estimated offering expenses of approximately [__]% of total, including the underwriters over-allotment option.

Assuming we receive net proceeds of $____, we expect to use the proceeds of this offering as follows:
 
Increase in registered capital of Wujiang Luxiang and corresponding lending and guarantee capacity
  $      [        ] (1 )
General working capital (including potential acquisitions)
  $ 1,000,000 (2 )
Expenses reserve
  $ 650,000 (3 )
Investor relations reserve
  $ 500,000 (4 )
Total
  $      
 
(1)    
We intend to use all of the net proceeds of this offering not otherwise designated below to increase registered capital of Wujiang Luxiang and its lending capacity.  Our lending and guaranteeing capacity will be increased when the registered capital is increased. In addition, we believe that increased registered capital will increase our ability to borrow funds from third-party banks, which in turn will further increase our lending and guarantee capacity,
 
(2)    
We intend to use $1,000,000 of the net proceeds of this offering for general corporate purposes, such as general and administrative expenses, capital expenditures, working capital and potential acquisition of similar lending companies in the Jiangsu province of the PRC if a good opportunity presents itself.  To date we have not entered into any binding arrangements to acquire any other entities nor is there any arrangement or understanding to acquire other microcredit companies, and we may never enter into any such agreements.  If acquisitions do not occur, we may use a portion of the balance to increase our registered capital further.
 
(3)    
We intend to have an expense reserve of $650,000 to engage legal and accounting professionals in compliance with the Exchange Act reporting obligations.
 
(4)    
We intend to have a reserve of $700,000 consisting of $500,000 of cash and $200,000 of common stock to be used to engage investor relations professionals to assist in shareholder communications.
 
The amount that we actually expend will depend on a number of factors, including our development, activities, as well as the amount of cash generated or used by our operations. We may find it necessary or advisable to use a portion of the net proceeds for other purposes, and we will have broad discretion in the application of the net proceeds.

The Underwriter has a [__]-day option to purchase up to _________________ additional shares of our common stock at the public offering price solely to cover over-allotments, if any. Any proceeds received from the over-allotment will be used to increase registered capital.
 
DETERMINATION OF THE OFFERING PRICE

There is no established public market for our shares of common stock. The offering price of $[__] per share was determined by us and the underwriter arbitrarily. We believe that this price reflects the appropriate price that a potential investor would be willing to pay for a share of our common stock at this initial stage of our development. This price bears no relationship whatsoever to our business plan, the price paid for our shares prior to this offering, our assets, earnings, book value or any other criteria of value. The offering price should not be regarded as an indicator of the future market price of the securities, which is likely to fluctuate.
 
 
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MARKET FOR OUR COMMON STOCK
 
Market Information
 
Prior to this offering, there is no established public market for our common stock.  We have filed an application to have our common stock listed on the NASDAQ. We will have to satisfy certain criteria in order for our application to be accepted.  We may not be able to meet the requisite criteria or that our application will be accepted. This offering is contingent on our application being accepted.  Even if accepted, there can be no assurance that an active trading market for our shares will develop, or, if developed, that it will be sustained.
 
We have issued 11,520,737 shares of our common stock since the Company was incorporated on December 19, 2011. There are no outstanding options or warrants or securities that are convertible into shares of common stock, except for 645 shares of Series A Preferred Stock and 1,280 shares of Series B Preferred Stock that are convertible into common stock upon consummation of this offering.  See “Description of Capital Stock – Preferred Stock.”
 
Holders
 
We had 90 holders of record of our common stock as of the date of this prospectus.
 
Dividends
 
Wujiang Luxiang declared and paid dividends for the years of 2009, 2010 and 2011.  According to PRC laws and regulations, after-tax profit must be distributed in the order of statutory reserve, statutory welfare reserve, and shareholder dividends. We do not anticipate paying dividends in 2013 or the foreseeable future. Although we intend to retain our earnings, if any, to finance the growth of our business, our Board of Directors will have the discretion to declare and pay dividends in the future, subject to applicable PRC regulations and restrictions as described below. Payment of dividends in the future will depend upon our earnings, capital requirements, and other factors, which our Board of Directors may deem relevant.
 
In addition, due to various restrictions under PRC laws on the distribution of dividends by WFOE, we may not be able to pay dividends to our stockholders. The Wholly-Foreign Owned Enterprise Law (1986), as amended, and The Wholly-Foreign Owned Enterprise Law Implementing Rules (1990), as amended, and the Company Law of the PRC (2006), contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, such companies are required to set aside a certain amount of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC Therefore, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of dividends from the Company’s profits. Furthermore, if our subsidiaries and affiliates in China incur debt on their own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we or our subsidiaries and affiliates are unable to receive all of the revenues from our operations through the current contractual arrangements, we may be unable to pay dividends on our common stock.
 
 
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CAPITALIZATION
 
The following table summarizes the capitalization of CCC as of December 31, 2012:
 
on an actual basis; and
 
on an adjusted basis to reflect our receipt of estimated net proceeds from the sale of [____] shares of common stock (excluding the [_____] shares of common stock which the underwriter has the option to purchase to cover over-allotments, if any) in this offering at an offering price of $[    ] per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses.
 
You should read this table in conjunction with the sections of this prospectus entitled “Use of Proceeds,” “Summary of Condensed Financial Information,” “Selected Condensed Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our condensed financial statements and related notes included elsewhere in this prospectus.
 
   
December 31, 2012
 
  
 
Actual
   
As Adjusted
 
Cash
 
$
1,588,061 
   
$
   
Series A Preferred Stock, par value $0.001 per share, 1,000,000 shares authorized, 645 shares issued and outstanding at December 31, 2012
   
241,875 
         
Series B Preferred Stock, par value $0.001 per share,  5,000,000 shares authorized, 1,280 shares issued and outstanding at December 31, 2012
   
240,000
         
Common stock, par value $0.001 per share, 100,000,000 shares authorized, and 11,520,737 issued and outstanding at December 31, 2012
   
11,521
         
Subscription receivable
   
(11,062)
         
Additional paid-in capital
   
43,763,003 
         
Statutory reserves
   
4,232,164 
         
Retained earnings
   
14,558,205 
         
Accumulated other comprehensive income
   
4,213,373 
         
Total stockholders’ equity
   
67,249,079 
         
 
DILUTION
 
The historical net tangible book value of CCC’s common stock as of December 31, 2012 was $67,249,079, or $5.84 per share based upon 11,520,737 shares of common stock outstanding on such date.  Historical net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares of common stock outstanding.

If you invest in our shares of common stock, you will incur immediate, substantial dilution based on the difference between the public offering price per share you will pay in this offering and the net tangible book value per share of common stock immediately after this offering.

Pro forma net tangible book value represents the amount of our total tangible assets reduced by our total liabilities after giving effect to the sale of _____________ shares of common stock at a price of $__________ per share in this offering. Tangible assets equal our total assets less goodwill and intangible assets.  Pro forma net tangible book value per share represents our pro forma net tangible book value divided by the number of shares of common stock outstanding after giving effect to the issuance of _______________ shares issuable in this offering.  Net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding as of _____. As of December 31, 2012, our pro forma net tangible book value was $___ and our pro forma net tangible book value per share was $____ (unaudited) based on 11,520,737 shares of common stock outstanding. 

Dilution in net tangible book value per share to new investors represents the difference between the amount per share paid by purchasers of shares in this offering and the net tangible book value per share of common stock immediately after completion of this offering.
 
 
32

 

After giving effect to the sale of all the shares being sold pursuant to this offering at the offering price of $_______ per share and after deducting underwriting discount and commission payable by us in the amount of $______________ and estimated offering expenses in the amount of $______________, our net tangible book value would be approximately $____________ , or $__________ per share of common stock. This represents an immediate increase in net tangible book value of $__________ per share of common stock to existing stockholders and an immediate dilution in net tangible book value of $___________ per share to new investors purchasing the shares in this offering.
 
The following table illustrates this per share dilution:

   
As of
December 31, 2012
   
As
Adjusted
 
Public offering price per share of common stock
 
$
[   ____ ]
   
$
   
Net tangible book value per share as of December 31, 2012
   
5.84
         
Increase in net tangible book value per share attributable to existing stockholders
   
[   ____ ]
         
Net tangible book value per share as adjusted after this offering
   
[   ____ ]
         
Dilution per share to new investors
   
[   ____ ]
         
 
Our adjusted pro forma net tangible book value after the offering, and the dilution to new investors in the offering, will change from the amounts shown above if the underwriter’ over-allotment option is exercised.
 
A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) our adjusted pro forma net tangible book value per share after this offering by approximately [$   ], and dilution per share to new investors by approximately $[   ], after deducting the underwriting discount and estimated offering expenses payable by us.
 
EXCHANGE RATE INFORMATION
 
Our business is primarily conducted in China and all of our revenues are received and denominated in RMB. Capital accounts of our condensed financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred.  Assets and liabilities are translated at the exchange rates as of the balance sheet date.  Income and expenditures are translated at the average exchange rate of the period.  RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions.  No representation is made that the RMB amounts could have been, or could be, converted into United States dollars at the rates used in translation.
 
The following table sets forth information concerning exchange rates between the RMB and the United States dollar for the periods indicated.
 
   
December 31 (1)
   
Yearly
Average (2)
 
2010
   
6.6018
     
6.7696
 
2011
   
6.3585
     
6.4640
 
2012
   
6.3086
     
6.3116
 

(1)
The exchange rates reflect the noon buying rate in effect in New York City for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York.

(2)
Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.
 
 
33

 
 
SELECTED CONDENSED FINANCIAL AND OPERATING DATA
 
The following selected condensed financial and operating data should be read together with CCC’s financial statements and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.  The selected financial data in this section are not intended to replace our financial statements and the related notes.  Our historical results are not necessarily indicative of our future results.
 
The selected condensed statement of operations and balance sheet data for the years ended December 31, 2012 and December 31, 2011 are derived from CCC’s audited financial statements, appearing elsewhere in this prospectus. 

CHINA COMMERCIAL CREDIT, INC

   
At December 31,
 
   
2012
   
2011
 
Selected Financial Condition Data:
           
Total assets
  $ 100,004,819     $ 94,556,429  
Cash and due from banks
    1,588,061       3,549,644  
Pledged bank deposit
    11,595,489       12,443,735  
Loans receivable, net
    84,923,480       76,022,989  
Borrowings
    20,606,791       23,590,469  
Non -interest bearing deposits
    9,428,061       9,113,229  
Stockholders’ equity
    67,249,079       59,126,189  
 
CHINA COMMERCIAL CREDIT, INC
 
   
For the Years Ended
 
   
December 31,
 
   
2012
   
2011
 
             
Selected Operations Data :
           
Total interest income
  $ 12,289,059     $ 11,175,844  
Total interest expense
    1,298,081       1,584,233  
Net interest income
    10,990,978       9,591,611  
Provision for loan losses
    85,035       42,994  
Net interest income after provision
    10,905,943       9,548,617  
Commissions and fees on guarantee services, net
    1,680,781       1,314,368  
Other noninterest income
    323,977       725,832  
Total noninterest income
    2,004,758       2,040,200  
Salaries and employee surcharge
    1,052,199       838,572  
Business taxes and surcharge
    472,216       528,286  
Other noninterest expense
    1,366,851       729,498  
Total noninterest expense
    2,891,266       2,096,356  
Income (loss) before income taxes
    10,019,435       9,492,461  
Income tax expense (benefit)
    1,706,966       1,190,556  
Net income (loss)
  $ 8,312,469     $ 8,301,905  

 
34

 
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The information contained in this prospectus, including in the documents incorporated by reference into this prospectus, includes some statements that are not purely historical and that are “forward-looking statements.”  Such forward-looking statements include, but are not limited to, statements regarding our company’s and our management’s expectations, hopes, beliefs, intentions or strategies regarding the future, including our financial condition and results of operations.  In addition, any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.  The words “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” and similar expressions, or the negatives of such terms, may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.

The forward-looking statements contained in this prospectus are based on current expectations and beliefs concerning future developments and the potential effects on the parties and the transaction.  Future developments actually affecting us may not be those anticipated.  These forward-looking statements involve a number of risks, uncertainties (some of which are beyond the parties’ control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements.  Examples are statements regarding future developments with respect to the following:

    
Our ability to develop and market our microcredit lending and guarantee business in the future;

    
Any changes in the laws of the PRC or local province that may affect our operations;

    
Inflation and fluctuations in foreign currency exchange rates;

    
Our on-going ability to obtain all mandatory and voluntary government and other industry certifications, approvals, and/or licenses to conduct our business;

    
Development of a public trading market for our securities; and

    
The costs we may incur in the future from complying with current and future governmental regulations and the impact of any changes in the regulations on our operations.

You should not rely upon forward-looking statements as predictions of future events.  The events and circumstances reflected in the forward-looking statements may not be achieved or occur.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements.  Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.
 
You should read this prospectus, and the documents that we reference in this prospectus and have filed as exhibits to the Registration Statement, of which this prospectus forms a part with the SEC, completely and with the understanding that our actual future results, levels of activity, performance and achievements may materially differ from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
 
 
35

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
We are a small business lender, providing short-term direct loans and loan guarantees to SMEs located in Wujiang City, Jiangsu Province of China.  Since our inception in October 2008, we have developed a large and growing number of borrowers in Wujiang City.  As of December 31, 2012, we have built an $85.8 million portfolio of direct loans to 248 borrowers and a total of $86.4 million in guarantees for 116 borrowers.  For the years ended December 31, 2012 and 2011, we generated $12,586,724 and $10,862,985 of net revenue, respectively, with $8,312,469 and $8,301,905 of net income, respectively.
 
We were established under the 2008 Guidance on the Small Loan Company Pilot of the China Banking Regulatory Commission and the People's Bank of China (No.23) (“Circular No. 23”) to extend short-term loans and loan guarantees to SMEs, a class of borrowers that we believe have been under-served in the Chinese lending market. The loans that we provide bridge the gap between Chinese-state run banks that have not traditionally served the capital needs of SMEs and high interest rate “underground” lenders to provide capital at more favorable terms and sustainable interest rates.
 
The Company, through its wholly-owned subsidiary, Wujiang Luxiang Information Technology Consulting Co. Ltd (“WFOE”), a limited liability company formed under the laws of the P.R.C., controls our operating entity, Wujiang Luxiang, through a series of variable interest entity (VIE) contractual arrangements.   The VIE contracts provide us with management and control of Wujiang Luxiang and entitle the Company to receive the net income and control the assets of Wujiang Luxiang.  
 
Key Factors Affecting Our Results of Operation
 
Our business and operating results are affected by China’s overall economic growth.  Unfavorable changes could affect the demand for the services that we provide and could materially and adversely affect our results of operations.  Our results of operations are also affected by the regulations and industry policies related to the lending industry in the PRC.
 
Although we have generally benefited from China’s economic growth and the policies to encourage lending to farmers and SMEs, we are also affected by the complexity, uncertainties and changes in the PRC regulations governing the small loan industry. Due to PRC legal restrictions on foreign equity ownership of and investment in the lending sector in China, we rely on contractual arrangements with our PRC operating entity, Wujiang Luxiang, and its shareholders to conduct most of our business in China. We face risks associated with our control over our variable interest entity, as our control is based upon contractual arrangements rather than equity ownership.
 
 
36

 
 
Results of Operations
 
YEAR ENDED DECEMBER 31, 2012 AS COMPARED TO YEAR ENDED DECEMBER 31, 2011
 
CHINA COMMERCIAL CREDIT, INC.
 
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 
   
For the Year Ended
   
Change
 
   
December 31,
    $     %  
    2012     2011                
Interest income
                         
Interests and fees on loans
  $ 12,003,158     $ 10,854,752     $ 1,148,406       11 %
Interests and fees on loans-related party
    13,119       72,830       (59,711 )     (82 %)
Interests on deposits with banks
    272,782       248,262       24,520       10 %
Total interest income
    12,289,059       11,175,844       1,113,215       10 %
                                 
Interest expense
                               
Interest expense on short-term bank loans
    (1,298,081 )     (1,237,312 )     (60,769 )     5 %
Interest expense on short-term borrowings-related party
    -       (346,921 )     346,921       (100 %)
Net interest income
    10,990,978       9,591,611       1,399,367       15 %
Provision for loan losses
    (85,035 )     (42,994 )     (42,041 )     98 %
Net interest income after provision for loan losses
    10,905,943       9,548,617       1,357,326       14 %
Commissions and fees on financial guarantee services
    1,667,067       1,441,942       225,125       16 %
Commissions and fees on financial guarantee services – related party
    -       10,297       (10,297 )     (100 %)
Under/(over) provision on financial guarantee services
    13,714       (137,871 )     151,585       (110 %)
Commission and fees on guarantee services, net
    1,680,781       1,314,368       366,413       28 %
NET REVENUE
    12,586,724       10,862,985       1,723,739       16 %
                                 
Non-interest income
                               
Government incentive
    188,146       623,345       (435,199 )     (70 %)
Other non-interest income
    135,831       102,487       33,344       33 %
Total non-interest income
    323,977       725,832       (401,855 )     (55 %)
                                 
Non-interest expense
                               
Salaries and employee surcharge
    (1,052,199 )     (838,572 )     (213,627 )     25 %
Rental expenses
    (254,921 )     (248,911 )     (6,010 )     2 %
Business taxes and surcharge
    (472,216 )     (528,286 )     56,070       (11 %)
Other operating expense
    (1,111,930 )     (480,587 )     (631,343 )     131 %
Total non-interest expense
    (2,891,266 )     (2,096,356 )     (794,910 )     38 %
                              23 %
INCOME BEFORE PROVISION FOR INCOME TAXES
    10,019,435       9,492,461       526,974       6 %
Provision for income taxes
    (1,706,966 )     (1,190,556 )     (516,410 )     43 %
Net Income
    8,312,469       8,301,905       10,564       0 %
                                 
Other comprehensive income
                               
Foreign currency translation adjustment
    471,501       2,163,403       (1,691,902 )     (78 %)
COMPREHENSIVE INCOME
  $ 8,783,970     $ 10,465,308     $ (1,681,338 )     (16 %)

 
37

 
 
The Company’s net income for the year ended December 31, 2012 was $8,312,469 representing an increase of $10,564 or 0.1%, over $8,301,905 for the year ended December 31, 2011. The increase in net income for the year ended December 31, 2012 was the net effect of the changes in the following components:
 
an increase in net interest income of $1,399,367;
 
an increase in the provision for loan losses of $42,041;
 
an increase in net commission and fees from our guarantee business of $366,413;
 
a decrease in non-interest income of $401,855;
 
an increase in non-interest expense of $794,910; and
 
an increase in enterprise income tax of $516,410.
 
The following paragraphs discuss changes in the components of net income in greater detail during the year ended December 31, 2012, as compared to the year ended December 31, 2011.
 
Net Interest income
 
Net interest income is equal to interest income we generated less interest expenses we incurred. The Company’s net interest income increased by $1,399,367 to $10,990,978 or 15% during the year ended December 31, 2012, compared to net interest income of $9,591,611 for the year ended December 31, 2011.
 
Interest income increased by $1,113,215 or 10% from $11,175,844 to $12,289,059 during the year ended December 31, 2012. The increase was primarily attributable to the robust demand for credit during 2012. Our aggregate loan balance has increased from $76,789,662 in 2011 to $85,781,293 in 2012  although the average market loan interest rates decreased from 15.2% for the year ended December 31, 2011 to 14.16% for the year ended December 31, 2012.
 
During the year ended December 31, 2012, the Company continued its effort to reduce related party transactions and accordingly the interest income from the loans to related party was reduced to $13,119, an 82% decrease, as compared to the same period of the prior year.
 
Due to the long-term nature of our deposits with third party banks, we utilized these deposits as term deposits during the year December 31, 2012 which in turn generated interest income of $272,782 as compared to $248,262 during the year ended December 31, 2011, during which we mainly utilized these deposits as demand deposit.
 
 
38

 
 
Interest expense represents interest incurred on short-term bank loans and loans from related party. The interest incurred on short term bank loans increased by $60,769 or 5%. This was because during 2011 our weighted average interest rate was 5.71% while during 2012 our weighted average interest rate was 6.34%. Interest incurred on loans from related parties decreased by $346,921 or 100% as a result of our effort to reduce related party transactions.
 
Provision for Loan Losses
 
The Company’s provision for loan losses were $85,035 and $42,994 for the years ended December 31, 2012 and 2011, respectively. Provision for loan losses reflects the increase in the allowance for loan losses for the reporting period as our loan receivable balance increased and hence higher risk was assessed.
 
Net Commission and Fees from Our Guarantee Business
 
The Company also generated net income by charging fees for financial guarantee services provided to our customers to help them obtain loans from other banks.  We generally charge a one-time fee of 1.8%-3.6% multiplied by the amount of loans being guaranteed based on the nature of the guarantee and whether the customer is new or existing. The net fees generated from our financial guarantee services increased from $1,314,368 for the year ended December 31, 2011, to $1,680,781 for the year ended December 31, 2012, representing an increase of $366,413 or 28%.
 
Our fees before provision on the financial guarantee services to third parties increased by $225,125 or 16% because the guarantees service business grew during 2011 and most of these new guarantee contracts have maturity dates beyond 2011 and hence more income was recognized in 2012 as compared to 2011.
 
Our fees before provision on the financial guarantee services to related-parties decreased from $10,297 to nil as a result of our effort to eliminate related party transactions.  The Company has provided guarantees for loans totalling $86.4 million as of December 31, 2012, compared to $88.7 million as of December 31, 2011.
 
The methodology the Company used to estimate the liability for probable guarantee loss considers the guarantee contract amount and a variety of factors, which include, depending on the counterparty, latest financial position and performance of the customers, actual defaults, estimated future defaults, historical loss experience, estimated value of collaterals or guarantees the costumers or third parties offered, and other economic conditions such as the economic trend of the area and the country. The estimates are based upon currently available information. Based on the past experience, the Company estimates the probable loss to be 1% of contract amount and reviews the provision on a quarterly basis. It has been determined that our guarantee business is sufficiently covered by the general provision, as such the Company’s provision for its guarantee business mainly reflects the increase in the general provision for guarantee business as of each year end as compared to the previous year end.
 
Non-interest income
 
Non-interest income decreased from $725,832 for the year ended December 31, 2011 to $323,977 for the year ended December 31, 2012, representing a decrease of $401,855 or 55%. Non-interest income mainly includes government incentive and rental income from the Company sub-leasing certain of its leased office space to third parties. The decrease is primarily attributable to the government incentive we received.
 
Government incentive received has decreased from $623,345 for the year in 2011 to $188,146 for the year in 2012. The government incentive is awarded by Jiangsu Finance Office to promote the development of microcredit agencies in Jiangsu Province. During 2012, due to increased number of applicants, the Jiangsu Finance Office announced a new calculation base for incentive. According to the new base, a portion of the government incentive can be obtained only if the Company’s annual average loan interest rate in fiscal year 2011 is less than 15%. The Company did not meet this requirement and hence did not qualify for that portion of the incentive.
 
Non-interest expenses
 
Non-interest expenses increased from $2,096,356 for the year ended December 31, 2011 to $2,891,266 for the year ended December 31, 2012, representing an increase of $794,910 or 38%. Non-interest expenses primarily consisted of salary and benefits for employees, business tax and surcharge, traveling cost, entertainment expenses, depreciation of equipment, office rental expenses, professional service fees, and office supplies.
 
 
39

 
 
The increase is mainly attributable to:
 
1.          
salaries and staff benefits, which increased by $213,627. We hired more employees and our average salary increased due to the increase of revenue for the year ended December 31, 2012, and

2.          
an increase in other operating expenses, which increased by $631,343. Other operating expenses were higher during the year ended December 31, 2012 compared to the same period of 2011, primarily due to an increase in auditing expense of $205,554, an increase in bank charges of $227,055 and an increase in legal and consulting expense of $126,659.
 
Income tax
 
Income taxes increased from $1,190,556 for the year ended December 31, 2011 to $1,706,966 for the year ended December 31, 2012, representing an increase of $516,410 or 43%.  The increase in income tax is mainly due to two reasons: (1) the increase of pre-tax income by 6% for the year ended December 31, 2012 and (2) the change of tax policy which in turn resulted in additional income tax expense. Prior to 2012, the Company was entitled to a preferential income tax rate of 12.5%. In April 2012, the Company received a notice from the local tax authority that the Company’s lending business is qualified for  a preferential tax rate of 12.5%, however, its taxable income arising from its guarantee business is subject to a standard tax rate of 25%.  The local tax authority required the Company to apply the new tax policy retroactively to 2011. Hence, the Company evaluated the impact of the changed policy on the income tax provision on the issued financial statements of 2011, and determined the understated income tax for 2011 was approximately $220,032, which was recorded in the financial statements for the year ended December 31, 2012, since the amount is minimal compared to its net income in 2011.
 
Foreign currency translation adjustment
 
Foreign currency translation adjustment decreased from $2,163,403 for the year ended December 31, 2011 to $471,501 for the year ended December 31, 2012, representing a decrease of $1,691,902 or 78%. The decrease was mainly due to the fluctuation of foreign exchange rates during 2012 and 2011.
 
Loan Portfolio Quality
 
One of our key objectives is to maintain a high level of loan portfolio quality. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by personally contacting the borrower. Initial contacts typically are made seven days after the date the payment is due, and warning letters are sent by our legal counsel approximately 90 days after the default. In most cases, deficiencies are promptly resolved. If the outstanding amount cannot be collected within 180 days after the maturity date and the parties could not reach an agreement on a specific repayment play, we will initiate legal proceedings in the court.
 
We also increase the frequency of visits to our customers and observe their daily production on site from time to time to observe their operating condition and collect their financial information on a random basis. Since most of our customers are in the Jiangsu area, it is also relatively easy to obtain information about our customers.
 
On loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases (“non-accrual” loans). Except for loans that are well secured and in the process of collection, it is our policy to discontinue accruing additional interest and reverse any interest accrued on any loan which is 90 days or more past due.
 
We account for our impaired loans in accordance with GAAP. An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for corporate and personal loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
 
We allow a one-time loan extension with time duration up to the original loan period, which is usually within twelve months. In order to qualify, the borrower must be current on interest payments. We do not grant a concession to debtors as the principal of the loan remains the same and interest rate is fixed at the current interest rate at the time of extension.
 
 
40

 
 
We use a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our portfolio of loans. Currently our loan portfolio concentrates in the textile industry and it is showing signs of slow-down. To maintain our loan portfolio quality, we have modified our loan policy to accept only textile companies with real estate as collateral or with professional guarantee company as the loan guarantee method.
 
In addition, we plan to diversify our risks by concentrating in small amount loans that are below $650,000 (or four million RMB). We also eliminated related party loans and initiated more loans to agriculture related business.
 
Currently, banking industry encourage SMEs to apply for loans under individual names so that when it is past due, both the SME and the responsible individual are liable for the past due amount. In 2012, our business loans remained the same as compared to 2011 while personal loans increased by 113.3%
 
Liquidity and Capital Resources
 
Cash Flows and Capital Resources
 
To date, we have financed our operations primarily through shareholder contributions, cash flow from operations and bank loans. As a result of our total cash activities, net cash decreased from $3,549,644 as of December 31, 2011 to $1,588,061 as of December 31, 2012.
 
We require cash for working capital, making loans, repayment of debt, salaries, commissions and related benefits and other operating expenses and income taxes. We expect that without the needs of future business expansion, our current working capital is sufficient to support our routine operations for the next twelve months.
 
We generate our cash flow from three sources; shareholder capital contribution, cash flow from operations and borrowings from other financial institutions.
 
However, as a microcredit company regulated by the Chinese Banking Regulatory Commission, we are prohibited from providing saving or checking services to our customers; our borrowing capacity from other financial institutions is also limited to 50% of our equity. Our currently available capital resources may not be sufficient to fund our anticipated expansion.
 
In addition to raising capital in this offering in order to meet the capital needs for our anticipated business expansion, we may take the following actions: (i) continue to improve our collection of loan receivable and interest receivable; (ii) if necessary, raise additional capital through the sale of additional equity; and (iii) enter into new, or refinance existing, short- and/or long-term commercial loans. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible debt securities, would dilute our shareholders. The incurrence of debt could result in operating and financial covenants that would restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business, operations and prospects may suffer.
 
Statement of Cash Flows
 
As of December 31, 2012, cash and cash equivalents were $1,588,061 as compared to $3,549,644 as of December 31, 2011.  
 
As of December 31, 2011, cash and cash equivalents were $3,549,644 as compared to $659,151 as of December 31, 2010.  
 
 
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The following table sets forth a summary of our cash flows for the years indicated:
 
   
For the Year Ended December 31,
 
   
2012
   
2011
 
Net cash provided by operating activities
 
$
8,295,938
   
$
9,024,635
 
Net cash used in investing activities
 
$
(6,492,402
)
 
$
(5,022,718
)
Net cash used in financing activities
 
$
(3,738,785
)  
$
(1,340,756
)
Effects of exchange rate changes on cash
 
$
(26,334
)  
$
229,332
 
Net cash  (outflow)/ inflow
 
$
(1,961,583
)  
$
2,890,493
 
 
Net Cash Provided by Operating Activities
 
During the year ended December 31, 2012, we had positive cash flow from operating activities of $8,295,938, a decrease of $728,697 from the same period of 2011, during which we had cash flow from operating activities of $9,024,635. Even though the net income for the year ended December 31, 2012 has not changed significantly as compared to the year ended December 31, 2011, the decrease in net cash provided by operating activities was the result of several factors, including:
 
An increase in interest receivables of $301,064. This increase was due to higher interest income in the year ended December 31, 2012 while the credit terms are the same as the year ended December 31, 2011.
 
A decrease of tax receivables of $633,428. This is due to the Company is being required to prepay enterprise income taxes at a rate of 25% on a quarterly basis when the applicable tax rate is 12.5%. Within five months after December 31, the Company and the tax authority true up the difference between the taxes paid and taxes due. The increase in tax receivables was mainly due to higher tax receivables from the tax authority as a result of higher net income in 2012 which is the basis for the quarterly estimated tax, in the year ended December 31, 2012 as compared to that in the year ended December 31, 2011.
 
A decrease of other current liabilities of $280,856. The decrease in other current liabilities was mainly associated with more staff salary and bonus paid in the year ended December 31, 2012 as compared to the year ended December 31, 2011.
 
A decrease in unearned income from guarantee services of $409,381. The decrease in unearned income from guarantee services was due to more income being recognized as revenue from the guarantee business as guarantee service life matured in the year ended December 31, 2012 as compared to the year ended December 31, 2011.
 
Investing Activities
 
Net cash used in investing activities for the year ended December 31, 2012 was $6,492,402, compared to net cash used in investing activities of $5,022,718 for the year ended December 31, 2011. The cash used in investing activities for the year ended December 31, 2012 was mainly used to extend new loans. The cash used in investing activities for the year ended December 31, 2011 was mainly attributable to capital to extend new loans, lending to related party companies and increased deposit requirement by third party banks for the guarantee service.
 
Financing Activities
 
Net cash used in financing activities for the year ended December 31, 2012 totalled $3,738,785, compared to net cash used in financing activities of $1,340,756 for the year ended December 31, 2011. The cash used in financing activities for the year ended December 31, 2012 was mainly attributable to the proceeds from short-term bank borrowings of $23,812,727, net proceeds from preferred stock issuance of $508,971, offset by acquisition cost net of cash acquired of $245,401, dividends paid to shareholders of $842,554 and repayments of short term bank loans of $26,927,528. The cash used in financing activities for the year ended December 31, 2011 was mainly attributable to short-term bank borrowings of $41,448,912, short-term borrowings from a related party company of $7,609,633, offset by repayments of short-term bank borrowings of $38,151,697, repayments of amounts due to related party of $7,882,954 and payments of dividends of $4,364,650.
 
 
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Contractual Obligations
 
As of December 31, 2012, the annual amounts of future minimum payments under certain of our contractual obligations were:
 
   
Payments due by period
 
   
Total
   
Less than 1 year
   
1-3 years
   
3-5 years
   
More than 5 years
 
   
(in thousands)
 
Contractual obligations:
 
 
   
 
   
 
   
 
   
 
 
Short term bank loans (1)
  $ 20,606,791     $ 20,606,791     $ -     $  -     $ -  
Operating lease (2)
  $ 191,282     $ 191,282     $ -     $  -     $ -  
    $ 20,798,073     $ 20,798,073     $ -     $  -     $ -  

(1)
The bank loans bear a weighted average annual interest rate of 5.92 % with the principal and accrued interest (shown above accrued through December 31, 2012). We may elect to prepay the loans at any time without penalty.
(2)
Our lease for our office in Wujiang commenced on October 21, 2008 and will expire in September 30, 2013.
 
Off-Balance Sheet Arrangements
 
These financial guarantee contracts consist of providing guarantees to banks on behalf of borrowers to help them obtain loans from banks. The contract amounts reflect the extent of involvement the Company has in the guarantee business and also represents the Company’s maximum exposure to credit loss.
 
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its borrowers. Financial instruments whose contract amounts represent credit risk are as follows:
 
   
December 31,
 
   
2012
   
2011
   
2010
 
Guarantee
  $ 86,360,524     $ 88,742,628     $ 71,683,940  
 
Critical Accounting Policies
 
We prepare our financial statements in conformity with Accounting principles generally accepted by the United States of America (“U.S. GAAP”), which requires us to make judgments, estimates and assumptions that affect our reported amount of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and reported amounts of revenue and expenses during the reporting periods. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.
 
 
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An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the condensed financial statements. We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our condensed financial statements and other disclosures included in this prospectus.
 
Revenue recognition
 
Revenue is recognized when there are probable economic benefits to the Company and when the revenue can be measured reliably, on the following:
 
Interest income on loans. Interest on loan receivables is accrued monthly in accordance with their contractual terms and recorded in accrued interest receivable. The Company does not charge prepayment penalties from customers.
 
Commission on guarantee service. The Company receives the commissions from guarantee services in full at inception and records it as unearned income before amortizing it throughout the period of guarantee.
 
Non-interest income. Non-interest income mainly includes government incentive and rental income from the sub-leasing of certain of the Company’s leased office space to third parties. Government incentive is provided by Jiangsu Provincial government on a yearly basis to promote the development of microcredit agencies in Jiangsu Province.
 
Loans receivable, net
 
Loans receivable primarily represent loan amount due from customers. The management has the intent and ability to hold for the foreseeable future or until maturity or payoff. Loans receivable are recorded at unpaid principal balances, net of unearned income and allowance that reflects the Company’s best estimate of the amounts that will not be collected. Loan origination and commitment fees and certain direct loan origination costs collected from customers are directly recorded in current year interests and fees on loans. The loans receivable portfolio consists of corporate loans and personal loans. The Company does not charge loan origination and commitment fees.
 
Allowance for loan losses and loan impairment
 
The allowance for loan losses is increased by charges to income and decreased by charge offs (net of recoveries). The allowance for loan losses is maintained at a level believed to be reasonable by management to absorb probable losses inherent in the portfolio as of each balance sheet date.  The allowance is based on factors such as the size and current risk characteristics of the portfolio, an assessment of individual problem loans and actual loss, delinquency, and/or risk rating experience within the portfolio.
 
The Company evaluates its allowance for loan losses on a quarterly basis or more often as deemed necessary. The allowance for loan losses is increased by charges to income and decreased by charge offs (net of recoveries). The allowance for loan losses is maintained at a level believed to be reasonable by management to absorb probable losses inherent in the portfolio as of each balance sheet date.  The allowance is based on factors such as the size and current risk characteristics of the portfolio, an assessment of individual problem loans and pools of homogenous loans, and actual loss, delinquency, and/or risk rating experience within the portfolio.
 
The allowance is calculated at portfolio-level since our loans portfolio is typically of smaller balance homogenous loans and is collectively evaluated for impairment.
 
For the purpose of calculating portfolio-level reserves, we have grouped our loans into two portfolio segments: Corporate and Personal. The allowance consists of the combination of a quantitative assessment component based on statistical models, a retrospective evaluation of actual loss information to loss forecasts, value of collaterals and could include a qualitative component based on management judgment. Management takes into consideration relevant qualitative factors, including external and internal trends such as the impacts of collections and account management effectiveness, geographic concentrations, and economic events, among other factors, that have occurred but are not yet reflected in the quantitative assessment component. All qualitative adjustments are adequately documented, reviewed, and approved through our established risk governance processes. Refer to Note 6 for information on the allowance for loan losses.
 
 
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In addition, the Company also calculates the provision amount in accordance with PRC regulation “The Guidance for Loan Losses” (“The Provision Guidance”) issued by People’s Bank of China (“PBOC”) and is applied to all financial institutes as below:
 
1.    
General Reserve - is based on total loan receivable balance and to be used to cover unidentified probable loan loss. The General Reserve is required to be no less than 1% of total loan receivable balance.
2.    
Specific Reserve - is based on the level of loss of each loan after categorizing the loan according to their risk. According to the so-called “Five-Tier Principle” set forth in the Provision Guidance, the loans are categorized as “pass”, “special-attention”, “substantial”, “doubtful” or “loss”. Normally, the provision rate is 2% for “special-attention”,  25% for “substantial”, 50% for “doubtful”  and 100% for “loss”.
3.    
Special Reserve - is fund set aside covering losses due to risks related to a particular country, region, industry or type of loans. The reserve rate could be decided based on management estimate of loan collectability.

Due to the short term nature of the loans receivable and based on the Company’s past loan loss experience, the Company only includes General Reserve in the loan loss reserve.
 
To the extent the mandatory loan loss reserve rate as required by PBOC differs from management’s estimates, the management elects to use the higher rate.
 
Income Tax
 
Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes using the liability method. Under this method, deferred income taxes are recognized for tax consequences in future years of differences between the tax bases of assets and liabilities and their reported amounts in the financial statements at each year-end and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected to affect taxable income.
 
Recently issued accounting standards
 
In July 2012, the FASB issued ASU No. 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment." This ASU simplifies how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s combined financial position and results of operations.
 
On February 5, 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance is the culmination of the board’s redeliberation on reporting reclassification adjustments from accumulated other comprehensive income. The standard is effective prospectively for public entities for annual and interim reporting periods beginning after December 15, 2012. Non-public companies may adopt the standard one year later. Early adoption is permitted. Management does not expect this accounting standard update to have a material impact on the Company’s financial position, operations, or cash flows.
 
 
45

 
 
BUSINESS
 
Banking Industry in China

In the Chinese banking industry, four state-owned banks, namely Industrial & Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC) and Agricultural Bank of China (ABC), are the biggest players, though their dominance is in gradual decline. According to PBOC, banks in China extended $1.31 trillion (RMB 8.20 trillion) in loans in 2012, an increase of $ 0.12 trillion (RMB 0.73 trillion) compared to 2011.

Currently, there are over 100 local city commercial banks in China. Local governments have historically exerted a huge influence over local city commercial banks and it is not uncommon for them to hold a large bulk of their shares. As the name suggests, city commercial banks were formerly permitted to operate only within the city where they were located. Since 2004, the CBRC has allowed these local city commercial banks to expand outside their home region. Meanwhile, some of the smaller local commercial banks began to merge, forming larger regional banks.

The Current Lending Market and the Opportunity

The state-owned banks and local commercial banks make the majority of loans in the PRC. These large banks tend to provide financing to state-owned enterprises and large private firms. While large companies continue to obtain bank loans, SMEs must seek alternative sources of financing. Pursuant to Regulations on Standards of Categorizing Small and Medium Enterprises, depending on the industry, medium-sized businesses are defined as businesses with total assets between RMB 50 million and RMB 1.2 billion or revenues of between RMB 5 million and RMB 2 billion, and small and micro entities are defined as businesses with total assets or revenues less than the medium-sized entities’ threshold.

While state-owned enterprises still play a major role in the PRC economy, SMEs are becoming increasingly important in boosting China’s economy. The number of SMEs has grown from 100,000 in 1978 to approximately 50 million in 2010. According to data compiled by Development and Research Center of the State Council, SMEs account for nearly 60% of the GDP, 80% of the overall employment and more than half of economic output of China as of 2012. As a result, SMEs financing demands are on the rise.

Concerned about potential dangers to the PRC financial system caused by inflation, from 2010 the PBOC withdrew a significant amount of liquidity from the market, which has made it even harder for SMEs to gain access to capital.  Often unable to obtain bank loans, many SMEs have to borrow from so-called “underground” lenders.  “Underground” lenders take on various forms and may include non-depository banks, other financial institutions, and businesses that lend from their own surplus cash. Such underground lending is not permitted by the PRC banking regulations and therefore unregulated.  These lenders often charge interest rates many times higher than the PBOC Benchmark Rate. They use different schemes to avoid sanctions by the PRC regulations and the SME borrowers who borrowed from these underground lenders sometimes do not have affordable avenues to protect their interests.
 
A government crackdown on illegal “underground” lenders has been initiated.  Former Premier Wen Jiabao, on behalf of the State Council, stated that private, informal financing channels will only be encouraged “within the boundaries of the law.”  The State Council said that the government would crack down on illegal practices such as pyramid schemes and lending at excessively high interest rates. With the new government crackdown on illegal lending, traditional sources of credit could dry up, bringing SMEs fewer funding alternatives. It is from this environment that microcredit companies such as Wujiang Luxiang were approved and established since 2008.

Microcredit Industry in China

Under the credit crunch policy in China, many SMEs have encountered money shortages.  Since 2008, the micro credit industry in China has been rapidly developing. Microcredit companies play an increasingly important role to help SMEs solve their money shortage problems, while they seek their own profit margins.
 
The number of microcredit companies has increased dramatically in the China since such types of companies were first permitted in 2008.  According to the statistics provided by PBOC, as of September 2012, there were 5,629 microcredit companies in China. The total loan balance from microcredit companies stood at $83.67 billion (RMB 533 billion). In the province of Jiangsu, as of September 30, 2012 there are about 465 microcredit companies with total capital of $12.03 billion (RMB 76.65 billion) and the total loans outstanding of $15.90 billion (RMB 101.2 billion).
 
 
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The microcredit companies typically are profitable. According to Xiaoling Wu, the vice chairman of the National People’s Congress Financial and Economic Committee, who spoke at the Microcredit Innovation Forum held on January 16, 2010, overall, microcredit companies’ return on capital was 7.76%, while the microcredit companies in Zejiang, Shanghai, and Jiangsu generated returns on capital of 15.68%, 11.56%, and 10.70%, respectively, which make them the top three areas in terms of return on capital for microcredit companies.
 
City of Wujiang
 
Wujiang is located 11 miles south of Suzhou city and 34 miles east of Shanghai. Traditionally, Wujiang has been regarded as “the Land of Fish and Rice” and “the Capital of Silk”. In recent years, it is also known to be “the Capital of Cable and Optical Cable” and also “the City of Electronics”.
 
Wujiang’s economy is well developed. It currently ranks as one of the most economically successful cities in China. The GDP in 2011 reached $18.83 billion (RMB 119.2 billion), an increase of 18.8% from 2010. The GDP per capita reached $14,757 (RMB 93,417), an increase of 12.5% from 2010. After years of development, Wujiang has attracted and nurtured may successful businesses in electronics, silk and textiles, as well as the cable and optical-cable sectors. By the end of 2011, Wujiang had 1,480 state-owned enterprises, 21,813 private owned enterprises, 40,952 individually owned businesses, 240 rural professional cooperatives and a farmer population of 471,300.

In 2011, the outstanding balance of the local and foreign currency deposits and loans in Wujiang were $25.6 billion (RMB 162.8 billion) and $20.3 billion (RMB 129.1 billion), respectively. The banking industry in Wujiang realized profits of $0.77 billion (RMB 4.9 billion) in 2011. By the end of 2011, Wujiang had 17 financial institutions and 11 rural microcredit companies, an increase of 37.5% from 2010.  In 2012, the total outstanding balance of the 11 microcredit companies were $1.02 billion (RMB 6.49 billion) in 2012, an increase of 12.02% from 2011.
 
According to the market analysis, in 2013 and 2014, the capital needs in the city of Wujiang will increase to $39.3 billion (RMB 250 billion Yuan). We believe the local microcredit companies will have to rapidly develop to meet such needs in the next few years.

Our History and Corporate Structure

China Commercial Credit, Inc. is a holding company that was incorporated under the laws of the State of Delaware on December 19, 2011. Wujiang Luxiang was established in China on October 21, 2008.
 
Contractual Arrangements

There are no PRC state, provincial or local laws, rules and regulations prohibiting or restricting direct foreign equity ownership in companies engaged in microcredit business. However, the provincial authorities regulate microcredit companies through strict licensing requirements and approval procedures.  Direct controlling foreign ownership in a for-profit microcredit company has never been approved by competent Jiangsu government authorities. Based on the current position taken by the competent Jiangsu government authorities, direct foreign ownership of a microcredit company will not be approved in the foreseeable future.

As such, neither we nor our subsidiaries own any equity interest in Wujiang Luxiang.  Instead, we control and receive the economic benefits of Wujiang Luxiang’s business operation through a series of contractual arrangements.  WFOE, Wujiang Luxiang and its shareholders entered into a series of contractual arrangements, also known as VIE Agreements, on September 26, 2012.   The VIE agreements are designed to provide WFOE with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Wujiang Luxiang, including absolute control rights and the rights to the assets, property and revenue of Wujiang Luxiang.  Based on a legal opinion issued by Da Cheng Law Offices to WFOE, the VIE agreements constitute valid and binding obligations of the parties to such agreements, and are enforceable and valid in accordance with the laws of the PRC. 

According to the Exclusive Business Cooperation Agreement, Wujiang Luxiang is obligated to pay service fees to WFOE approximately equal to the net income of Wujiang Luxiang.. Since substantially all the proceeds from this offering and future offerings will be used to increase Wujiang Luxiang’s registered capital to expand its lending capacity, management believes Wujiang Luxiang will be able to grow and expand its business via such VIE arrangement.
 
 
47

 

Each of the VIE Agreements are described in detail below:
 
 Exclusive Business Cooperation Agreement
 
Pursuant to the Exclusive Business Cooperation Agreement between Wujiang Luxiang and WFOE, WFOE provides Wujiang Luxiang with technical support, consulting services and other management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages in technology, human resources, and information. Additionally, Wujiang Luxiang grants an irrevocable and exclusive option to WFOE to purchase from Wujiang Luxiang, any or all of its assets, to the extent permitted under the PRC laws. WFOE may exercise, at its sole discretion, the option to purchase from Wujiang Luxiang any or all of Wujiang Luxiang’s assets at the lowest purchase price permitted by PRC laws. In case WFOE exercises such option, the parties shall enter into a separate assets transfer agreement. WFOE shall own all intellectual property rights that are developed during the course of the Exclusive Business Cooperation Agreement. For services rendered to Wujiang Luxiang by WFOE under this agreement, the service fee Wujiang Luxiang is obligated to pay shall be calculated based on the time of services rendered multiplied by the corresponding rate, which is approximately equal to the net income of Wujiang Luxiang.
 
The Exclusive Business Cooperation Agreement shall remain in effect for ten years until it is terminated by WFOE with 30-day prior notice. Wujiang Luxiang does not have the right to terminate the agreement unilaterally. WFOE may unilaterally extend the term of this agreement with prior written notice.

The sole director and president of WFOE, Mr. Qin, is currently managing Wujiang Luxiang pursuant to the terms of the Exclusive Business Cooperation Agreement. WFOE has absolute authority relating to the management of Wujiang Luxiang, including but not limited to decisions with regard to expenses, salary raises and bonuses, hiring, firing and other operational functions. The Exclusive Business Cooperation Agreement does not prohibit related party transactions. Upon installation of the audit committee at the consummation of this offering, the audit committee of CCC will review and approve in advance any related party transactions, including transactions involving WFOE or Wujiang Luxiang.
 
  Share Pledge Agreement
 
Under the Share Pledge Agreement between the shareholders of Wujiang Luxiang and WFOE, the 12 Wujiang Luxiang Shareholders pledged all of their equity interests in Wujiang Luxiang to WFOE to guarantee the performance of Wujiang Luxiang’s obligations under the Exclusive Business Cooperation Agreement.  Under the terms of the agreement, in the event that Wujiang Luxiang or its shareholders breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, WFOE, as pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends generated by the pledged equity interests.  The shareholders of Wujiang Luxiang also agreed that upon occurrence of any event of default, as set forth in the Share Pledge Agreement, WFOE is entitled to dispose of the pledged equity interest in accordance with applicable PRC laws.  The shareholders of Wujiang Luxiang further agree not to dispose of the pledged equity interests or take any actions that would prejudice WFOE’s interest.

The Share Pledge Agreement shall be effective until all payments due under the Exclusive Business Cooperation Agreement have been paid by Wujiang Luxiang.  WFOE shall cancel or terminate the Share Pledge Agreement upon Wujiang Luxiang’s full payment of fees payable under the Exclusive Business Cooperation Agreement.

Exclusive Option Agreement
 
Under the Exclusive Option Agreement, the shareholders of Wujiang Luxiang irrevocably granted WFOE (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in Wujiang Luxiang.  The option price is equal to the capital paid in by the Wujiang Luxiang Shareholders subject to any appraisal or restrictions required by applicable PRC laws and regulations. As of the date of this prospectus, if WFOE exercised such option, the total option price that would be paid to all of the Wujiang Luxiang Shareholders would be $44,063,863, which is the aggregate registered capital of Wujiang Luxiang.   The option purchase price shall increase in case the Wujiang Luxiang Shareholders make additional capital contributions to Wujiang Luxiang.

The agreement remains effective for a term of ten years and may be renewed at WFOE’s election.
 
 Power of Attorney
 
Under the Power of Attorney, the shareholders of Wujiang Luxiang authorize WFOE to act on their behalf as their exclusive agent and attorney with respect to all rights as shareholders, including but not limited to:  (a) attending shareholders' meetings; (b) exercising all the shareholder's rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association, including but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders the legal representative, the executive director, supervisor, the chief executive officer and other senior management members of Wujiang Luxiang.
 
 
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Although it is not explicitly stipulated in the Power of Attorney, the term of the Power of Attorney shall be the same as the term of that of the Exclusive Option Agreement.
 
Timely Reporting Agreement
 
To ensure Wujiang Luxiang promptly provides all of the information that WFOE and the Company need to file various reports with the SEC, a Timely Reporting Agreement was entered between Wujiang Luxiang and the Company.

Under the Timely Reporting Agreement, Wujiang Luxiang agrees that it is obligated to make its officers and directors available to the Company and promptly provide all information required by the Company so that the Company can file all necessary SEC and other regulatory reports as required.

Although it is not explicitly stipulated in the Timely Reporting Agreement, the parties agreed its term shall be the same as that of the Exclusive Business Cooperation Agreement.
 
Loan Agreement between WFOE and Wujiang Luxiang Shareholders   
 
Prior to closing of this offering, WFOE and Wujiang Luxiang Shareholders will enter into a loan agreement pursuant to which WFOE will lend to the Wujiang Luxiang Shareholders most of the net proceeds of this offering, who shall then contribute the entire amount of their loans to Wujiang Luxiang for the purpose of increasing its registered capital. WFOE shall deposit the funds into an escrow account designated by WFOE, to be released only to Wujiang Luxiang upon WFOE’s instruction to the escrow agent.  In the event that any Wujiang Luxiang Shareholder fails to repay the loan proceeds at the termination of the loan agreement, such shareholder shall be obligated to make a penalty interest payment to WFOE at the interest rate of 0.07% per day.
 
Our Services

General

We generally provide two types of services, direct loans and guarantee services, to borrowers located within City of Wujiang, Jiangsu Province of China. In our direct loan business, we provide short-term loans to the borrowers and generate interest income.  In our guarantee business, we act as a guarantor to borrowers applying for short-term direct loans with other lenders and generate fee income.  Our clients in both the direct loan and guarantee businesses are primarily SMEs, farmers and individuals who generally use the proceeds of the loans for business related purposes.
 
We fund our lending and guarantee operations by using our registered capital, drawing down from the line of credit we have with state-owned or commercial banks, and using cash generated from our operations.  We currently have only one line of credit agreement with Agricultural Bank of China, the amount we are allowed to finance through debt financing is limited at 50% of our net capital. As of December 31, 2012, we have borrowed approximately $ 20.60 million (RMB 130 million) from Agricultural Bank of China and there is still another $ 3.17 million (RMB 20 million) available under the line of credit.

As of December 31, 2012, we have built an $85.8 million portfolio of direct loans to 248 borrowers and guaranteed 145 loans aggregating $86.4 million for 116 borrowers.  For the years ended December 31, 2012 and 2011, none of the borrowers accounted for more than 10% of our revenue.  We are not dependent on any one borrower in either our direct loan or guarantee business. For the years ended December 31, 2011 and 2012, we generated $10,862,985 and $12,586,724 of net revenue with $8,301,905 and $8,312,469 of net income, respectively.

Our Services

Direct Loans

We provide direct loans to borrowers with terms not exceeding one year. During 2012, the average principal loan amount we provide is approximately $268,000. The interest rate we charge on a specific direct loan depends on a number of factors, including the type of borrower and whether the loan is secured or unsecured. We also take into account the quality of the collateral or guaranty given and the term of the loan.

Interest on our loans is usually payable monthly and averaged 14.16% for our direct loan portfolio for the twelve months ended December 31, 2012. Under certain Jiangsu banking regulations, since August 2012, we are allowed to charge an interest rate within the range of 0.9 times and 3 times the PBOC benchmark interest rate (the “PBOC Rate”). As of December 31, 2012, the PBOC Rate was set at 6% per annum for one-year term loans and 5.6% for six-month term loans. During the fiscal year ended 2012, the average interest rate we charged to SMEs was 2.5 times the PBOC Rate or 13.67% for one-year term loans and 15.93% for six-month term loans. The interest on loans to farmers is subsidized by the Jiangsu government and usually results in farmers paying a rate lower than that of loans to SME’s. A portion of the difference between the lower rate charged to farmers and the rate charged to SME’s is remitted to us annually by the government as government incentive.
 
 
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We offer both secured and unsecured direct loans. As of December  31, 2012, there were 297 direct loans outstanding, with a total aggregate outstanding balance of approximately $85.8 million and interest rates ranging from 9.6% to 21.6% and terms of the loans ranging from 1 month  to 12 months.  The following table sets forth a summary of our direct loan portfolio as of December 31, 2012 and December 31, 2011:

   
Total Outstanding Balance as of
12/31/2012
   
Percentage of the Total Loan Portfolio
as of
12/31/2012
   
Total Outstanding Balance as of 12/31/2011
   
Percentage of the Total Loan Portfolio
as of
12/31/2011
 
Secured Loans:
 
 
 
 
 
 
 
 
 
 
 
 
Guarantee-backed loans
 
 
76,171,092
 
 
 
88.8
%
 
 
64,353,553
 
 
 
83.8
%
Pledge assets-backed loans
 
 
8,857,261
 
 
 
10.3
%
 
 
11,649,760
 
 
 
15.2
%
Collateral-backed loans
 
 
752,940
 
 
 
0.9
%
 
 
786,349
 
 
 
1.0
%
Unsecured Loans
 
 
-
 
 
 
-
 
 
 
-
 
 
 
-
 
Total:
 
 
85,781,293
 
 
 
100
%
 
 
76,789,662
 
 
 
100
%
 
Secured Loans

We offer three types of secured loans:

      
loans guaranteed by a third party, referred to in China as “guarantee-backed loans”;
      
loans secured by real property, referred to in China as “collateral-backed loans”; and
      
loans secured by personal property, referred to in China as “pledge-backed loans”.

 
Guarantee-backed loans
 
In the case of guarantee-backed loans, the third party guarantor and the borrower are jointly and severably liable for the repayment of the loan.  The third party guarantor, whether being an individual or legal entity, must be credit-worthy.  We do not require any asset from the borrower as collateral for such guarantee-backed loans.

 
Collateral-backed loans
 
In the case of collateral-backed loans, the borrowers provide land use rights or building ownership as collateral for the loan.

For loans secured by land use rights, the principal amount we grant is no more than 50-70% of the value of the land use rights. The percentage varies depending on the liquidity of the land use rights. For loans secured by building ownership, the principal amount we grant can be up to 100% of the value of the building. We engage independent appraisal firms to determine the value of the land use rights or the building.

Prior to funding a direct loan secured by land use rights or building ownership, we register our security interest in the collateral with the appropriate government authority.  In the event that the borrower defaults, we take legal actions including legal proceedings against the default borrower and enforcement action resulting in the court’s sale of the asset through an auction.

 
Pledge-backed loans
 
In the case of pledge-backed loans, the borrowers pledge negotiable instruments as collateral for the loan.  The maximum principal amount of pledge-backed loans we extend is generally within 90% of the value of the pledged negotiable instrument.

We will take physical possession of the negotiable instrument at the time the loan is made and do not need to register such security interest with any government authority.  If the borrower defaults, we can acquire ownership of the negotiable instrument upon the borrower’s consent.  If the borrower refuses to settle the outstanding balance amicably by rendering ownership to the pledged instrument to us, we will then initiate legal proceedings in which the court will enforce transfer of the ownership.
 
 
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We require the business owners or individual shareholders of business borrowers to be jointly liable for the repayment of the loan.  In addition, we also require either a guarantee from a third party or certain assets as collateral.

Unsecured Loans

Prior to beginning of 2011, we provided a very small number of loans that were not secured by any collateral or guaranteed in any manner. Such loans were extended to borrowers with good track records and strong cash positions.  We have not provided any unsecured loans since the beginning of 2011. We have no such unsecured loans in our current portfolio and do not intend to make any such loans in the future.

Guarantee Services

For a fee, we also provide guarantees to third party lenders on behalf of borrowers applying for loans with such other lenders. Our guarantee is a commitment by us to repay the loan to the lender if the borrower defaults.  We, as the third party guarantor, are jointly and severally liable for the repayment of the full amount of the loan.  We have cooperation agreements with six state-owned and commercial banks pursuant to which we are accepted as a guarantor.

In order for us to agree to act as a guarantor, a borrower must provide a counter-guarantor to us or acceptable collateral to the third party lender such as land use rights, building ownership or a negotiable instrument. In addition, the borrower must deposit cash with us in an amount equal to the amount we are required to deposit with the third party lender which is usually 10% to 20% of the principal amount of the loan. If the borrower defaults and we pay the lender on borrower’s behalf, we will first recover from the cash deposit the borrower provided us and then demand the counter-guarantor make payment to us or recover the payment from the sale proceeds of the collateral asset.

In exchange for our guarantee, the borrowers pay us guarantee fees. We charge a per annum guarantee fee ranging from 1.56% to 1.80% of the principal amount of the underlying loan. The guarantee fees are payable in full when the guarantee is made. The criteria in determining the guarantee fee paid by the borrower are summarized in the following table:

Types of Security Interest
 
New Client
 
Previous or Existing Client
Land Use Rights or Building Ownership
 
1.68% of the principal amount of the underlying loan multiplied by the number of years of the guarantee
 
1.56% of the principal amount of the underlying loan multiplied by the number of years of the guarantee
         
Counter-Guarantor
 
1.80 % of the principal amount of the underlying loan multiplied by the number of years of the guarantee
 
1.62 % of the principal amount of the underlying loan multiplied by the number of years of the guarantee

In addition to the fee income, we earn interest on the refundable cash deposits provided to us by the borrowers.  Such cash deposits are required to be made to our bank account when we approve the guarantee application. After the expiration of the guarantee term, such cash deposits, without interest, will be refunded to the borrower once we receive a notice from the third party lender confirming termination of our guarantee obligation.

As of December 31, 2012, we have provided guarantees for a total of $86.4 million underlying loans to approximately 116 borrowers.
 
Consulting Services
 
During 2010 and 2011, we provided certain financing consulting services to approximately 50 individuals and companies and generated consulting fees of approximately US$ 188,733 (RMB 1.2 million). According to the consulting agreements we had with these parties, we agreed to provide consulting services such as advising on the applicable lending rules and regulations, making recommendations about financing plans, assisting the parties to complete and submit financing applications and providing general guidance in the capital raising process. Some of these clients were also our borrowers. We also charged additional consulting fees when the borrowers asked to expedite the review and approval process of their loan applications, as such expedited lendings are extra burdensome to our funding position.  None of these loans had interest rates higher than four times of the PBOC Benchmark Rate.
 
As discussed in detail in the risk factor entitled “We may be subject to administrative sanctions in the event we are found to have charged excessive interest rates on some of historical direct loans we extended.” on page 16 of the prospectus, in the event these historical consulting fees were found to be de facto interest payments, we may be found to have charged excessive rates on these loans and, as a result, we may be subject to sanctions by the competent authority, which may include return of the excessive interest to affected borrowers, confiscation of illegal gains, fine, suspension of operation and revocation of our business license.  However, management believes the likelihood of such administrative sanctions is very low. In addition, the amount of the consulting fee was immaterial compared to our net revenue in 2010 and 2011.  Therefore, management does not deem it necessary to accrue any liability.
 
We did not provide such consulting services during the fiscal year ended December 31, 2012 and management does not anticipate engaging in such consulting business in the foreseeable future.
 
 
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Loan/Guaranty Application, Review and Approval Process

We have a standard process with regard to how a loan or guarantee application is reviewed, processed and approved.  The same process applies to both applications for direct loans and for guarantees.

The application process starts with an inquiry from potential borrowers to our Loan Officer. The Loan Officer has the discretion whether to accept the inquirer as an applicant. If accepted, the Loan Officer assists in the preparation of an application package and implements a field visit of the applicant.

The application package usually includes the following items in order for it to be accepted:

       
Summary of the desired loan/guaranty: general description of the borrower, use of proceeds, amount, term of the loan, guarantee, collateral or counter-guarantee to be provided.
       
Identity information:  if the borrower is a legal entity, we require articles of incorporation, business license, state and local tax registration certificates, copies of the personal identification cards of all the shareholders and the legal representative; if the borrower is an individual, we require copies of personal identification cards of all the borrowers.
       
Banking relationship documents: including loan application with banks or other lenders, permission to open bank accounts, and credit record.
       
Financial reports such as prior three years’ financial statements, interim financial reports, and recent tax returns.
       
Business operation documents including samples of sales contracts or customer contracts, and utility bills over the past few months.
       
Consents: if the borrower is an entity, board or shareholder consent for the loan.
 
The flow chart below summarizes the loan/guarantee application, review and approval process.

 
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The reviews during steps 1, 2, 3 and 4 are deemed Level One review. The Loan Review Committee’s review is deemed Level Two review. The General Manager’s final review is the Level Three review. Typically it takes one to two weeks to complete our review.
 
In 2011, we processed a total of 575 applications for loans and guarantees.  45 of them were rejected during Level One review, 11 rejected during the Level Two review and 4 denied during the Level Three review.   The overall denial rate was 10.43%.

In 2012, we processed a total of 624 applications for loans and guarantees.  39 of them were rejected during the Level One review, 30 rejected during the Level Two review and 7 denied during the Level Three review.   The overall denial rate was 12.2%.

Loan Extension and Renewal

In our direct loan business, if a borrower has difficulty repaying the principal amount and/or accrued interest in full at the maturity date due to a temporary situation, the borrower may choose to either apply for an extension of the term or a renewal of the loan.  The extension or renewal applications are reviewed in accordance with the same loan application, review and approval process outlined above.  In our guarantee business, we generally do not extend the guarantee period.
 
 
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Loan Extension

We will generally approve loan extensions for borrowers who have made timely interest payments, are capable of paying the balance and have loans secured by sufficient collateral or guaranteed by an acceptable guarantor. The term of the loan extensions we grant is generally no longer than the term of the original loan and we only agree to extend a loan one time. If the loan extension application is not approved prior to the original maturity date of the loan, it will be transferred to the collection department and labeled as a default loan. As of December 31, 2012, extended loans constituted 0.58% of our total outstanding direct loan balance.

Loan Renewal

Many of our borrowers repay their loans and re-borrow at a later date, being referred to as a “loan renewal”. We consider a renewed loan a new loan, not a loan extension, despite our previous relationship with the borrower. Prior to the maturity date of the loan, the borrower may choose to apply to renew the loan. In order for the loan renewal application to be approved, the borrower must agree to repay the existing loan’s principal amount and accrued interest in full before the renewal application is approved.  Although we do not have a specific clean-up period policy, we do require that the period of time between repayment of the existing loan and the funding of the new loan to be 2-10 days. As of December 31, 2012, renewed loans constituted 73.26 % of our total outstanding direct loan balance.
 
Collection Procedure

We have standard collection procedures in our direct loan business. We call every borrower approximately 15 days prior to the maturity date to remind them that if we do not receive the repayment in full on the maturity date, we will send a written collection notice within 7 days after the maturity date.  The Loan Officer will frequently call and make on-site visits to a borrower upon a loan going into default.  Within 90 days after the default, our legal counsel will send warning letters to the default borrower.  If the outstanding amount cannot be collected within 180 days after the maturity date and the parties could not reach an agreement on a specific repayment plan, we will initiate legal proceedings in the court.

We apply the same collection procedure in our guarantee business.  The only difference is that we will collect from both the borrowers (including recovery from the cash deposit the borrowers put down with us) and the counter-guarantor or pursue recovery from the collateral.

Risk Management

Credit Risk
 
As a microcredit lender, credit risk is the most significant risk for our business. In our direct loan business, we suffer financial loss when a borrower defaults and full collection cannot be achieved. In our guarantee business, in the event the borrower defaults in its payment obligation and we pay the lender on behalf of the borrower, we suffer financial loss when we cannot recover the full amount of the payment we paid to the lender (after collection from the cash deposit provided by the borrower) from the counter guarantor or the sale proceeds of the collateral.
 
Risk Assessment
 
We apply the same risk assessment approach and procedures for both direct loans and guarantee activities. We have a dedicated Risk Department which assesses and evaluates the credit risks through in-house research and analysis.  We follow the methodology and procedure outlined in our risk assessment guidelines.  According to our risk assessment guidelines, the basic principle is that the bench mark ratio multiplied by the financial risk quotient and non-financial risk quotient and the result is the comprehensive risk ratio. The financial risk quotient takes into consideration 16 factors in three categories, i.e. leverage, profitability and growth.  The non-financial risk quotient takes into consideration 12 factors in four categories, i.e. industry risk, enterprise risk, management risk and other risks.  In summary, our Risk Department assess the credit risks based on the payment ability of the underlying obligors, transaction structure as well as the industry of borrower and the general economic condition of the market we operate in.

Risk Control
 
In our direct lending business, we assess, monitor and control the credit risks both before and after the loan is extended.
 
 
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As discussed above, we assess the risks through the loan application, review and approval process.  Our Risk Department quantifies the risks related to a loan application in a risk assessment report by classifying the loan into one of three categories.  A loan with a score  of less than 0.35 points is deemed to be a low-risk loan. A loan with a score of between 0.35 and 0.5 points is considered a medium-risk loan. A loan with a score higher than 0.5 points will be classified as a high-risk loan.  We have higher requirements for the collateral and require the guarantor to be of higher payment capacity for loans labeled as higher risk.
 
After the loan or guarantee application is approved, we continue to monitor the credit risk. Our Loan Officers collect the borrower’s financial statements at the end of each quarter and conduct periodical field trips to the borrower’s facilities to observe its operation, sales, ability to make timely repayments, etc.  Based on the Loan Officers’ report, the comprehensive risk ratio of each loan is reviewed on a quarterly basis and adjustments are made to the ratio as necessary, according to the borrower’s operational and financial position and other factors outlined above. We label each outstanding loan as “Good”, “Maintenance” or “Contraction”.  For “Good” loans, we may extend further credit. For “Maintenance” loans, we will maintain the current credit level. For “Contraction” loans, we may reduce credit to the borrower.
 
Liquidity Risk
 
Liquidity risk is the risk to a bank's earnings and capital arising from its inability to timely meet obligations when they come due without incurring unacceptable losses.  As a microcredit company, we are prohibited by PRC banking regulations to accept deposits from the public.  Our funding sources include our registered capital, draw-down ability from any lines of credit we have with state-owned or commercial banks as well as cash generated from our operations.  Liquidity risk in our operation is therefore limited.  We monitor the repayment of loans drawn from the line of credit with Agricultural Bank of China, the only line of credit we currently have. 

Allowance for Loan Loss
 
Reserve for Direct Loan
 
In our direct loan business, we apply three loan loss reserve measurements:
 
 
Measurement 1- The Specific Reserve:
 
In determining our loan loss reserve, we follow the guidelines for the specific reserve set forth in “The Guidance on Provisioning for Loan Losses” (the “Provision Guidance”) issued by PBOC.
 
Specific reserves are funds set aside based on the anticipated level of loss of each loan after categorizing the loan according to the risks. Such specific reserves are to be used to cover specific losses. According to the “Five-Tier Principle” set forth in the Provision Guidance, the loans are categorized as “pass”, “special-mention”, “substantial”, “doubtful” or “loss”. The definition and provision rate for each category is set forth below.
 
Tier
 
Definition
 
Reserve Rate
Pass
 
Loans for which borrowers are expected to honor the terms of the contracts, and there is no reason to doubt their ability to repay the principal and accrued interest in full and on a timely basis.
 
0%
Special-mention
 
Loans for which borrowers are currently able to repay the principal and accrued interest in full, although the repayment of loans might be adversely affected by some factors.
 
2%
Substantial
 
Loans for which borrowers’ ability to repay the principal and accrued interest in full is apparently in question and borrowers cannot depend on the revenues generated from ordinary operations to repay the principal and accrued interest in full.  Lender may suffer some losses even though the underlying obligation is guaranteed by a third party or collateralized by certain assets.
 
25%
Doubtful
 
Loans for which borrowers are unable to repay principal and accrued interest in full. Lender will suffer significant losses even though the underlying obligation is guaranteed by a third party or collateralized by certain assets.
 
50%
Loss
 
Principal and accrued interest cannot be recovered or only a small portion can be recovered after taking all possible measures and resorting to necessary legal procedures.
 
100%
 
 
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Measurement 2 - The General Reserve:
 
General reserves are funds set aside based on certain percentage of the total outstanding balance and to be used to cover unidentified probable loan loss. The General Reserve is required to be no less than 1% of total outstanding balance. We use 1% of total outstanding balance in our calculation for the General Reserve.

 
Measurement 3 - Special Reserve
 
Special reserves are funds set aside covering losses due to risks related to a particular country, region, industry or type of loans. The reserve rate could be decided based on management estimates of loan collectability. We did not make Special Reserves for 2010, 2011 or 2012 due to the short-term and microcredit nature of our loans and our low loss rate in our operation history.
 
  For the fiscal years ended December 31, 2011 and 2012, our reserve measurements indicate the aggregate amount calculated based on General Reserve is higher than the amount calculated based on the Specific Reserve.  As such, the loan loss reserves we made for direct loan business is 1% of the total outstanding direct loan balances in those periods. We review the loss reserve on a quarterly basis.

As of December 31, 2012, the total outstanding direct loan balance was $85,781,293 and the loan loss reserve was $857,813.

Reserve for the Guarantee Services.
 
In our guarantee business, we are required to set aside reserves consisting of no less than 1% of the total outstanding balance of loans we guaranteed at the end of fiscal year and 50% of the income generated by our guarantee business during the fiscal year to cover probable losses.  The reserve of 50% of the income is applicable only to commission income not received during the period.  Since it is our standard practice to receive the guarantee fee in full in advance when the guarantee is made, we don’t think we are exposed to any risk with regard to receipt of such income. Therefore we did not set aside the reserve based on the 50% of the commission income.  We set aside 1% of our total outstanding guarantee portfolio as the reserve for our guarantee business for both 2011 and 2012.
 
We follow the same “Five-Tier Principal” in our measurement of reserve for the guarantee business. For the fiscal years ended December 31, 2011 and 2012, our reserve measurements indicate the aggregate amount calculated based on Five-Tier Principal is lower than the amount calculated based on the statutory requirement of 1% of the total outstanding guarantee portfolio.  As such, the reserves we made for the guarantee business is 1% of the total outstanding guarantee portfolio in those periods. We review the loss reserve on a quarterly basis.

As of December 31, 2012, the total outstanding balance we guaranteed was $86,360,524 and the loan loss reserve was $880,725.

Business Strategy

We intend to implement two primary strategies to expand and grow the size of our Company: (i) increase our lending capacity through the cash generated from operations and through increase of our registered capital by equity financing and (ii) potential acquisitions of similar microcredit companies in Jiangsu Province, China.
 
 Organic growth will occur through expansion of our direct loan and guarantee services directed at SMEs and farmers. Our existing direct loan and guarantee services could also be expanded by increasing our registered capital base with a portion of the proceeds of this offering or other financing.  The lending capacity of Wujiang Luxiang is limited to the aggregate of its registered capital, any loans it borrows and other funds permitted under PRC laws, such as profits generated from operation and donations, subject to certain statutory reserve deductions required under the PRC laws and regulation. According to a policy named “An Opinion Regarding Further Pushing Forward the Reform of Rural Microcredit Companies,” Su Zheng Ban Fa (2011) No. 8 (“Jiangsu Document No. 8”), the maximum obligation Wujiang Luxiang is allowed to provide guarantees for is three times its net capital. As of December 31, 2012, the registered capital of Wujiang Luxiang was $44,063,863. Under PRC laws, the registered capital refers to the total amount of equity investment made by the shareholders. Once the registered capital is established, it cannot be used for purposes beyond the approved business scope of that entity.  Upon closing of this offering, WFOE will receive the net proceeds of this offering, net of certain expense reserves. WFOE intends to then lend the entire amount of the net proceeds it receives (net of the Expense reserve and the investor relations reserve) to the 12 shareholders of Wujiang Luxiang who will be obligated to contribute such proceeds to Wujiang Luxiang to increase the registered capital of Wujiang Luxiang.  We believe that as our registered capital increases, we will be able to continue to expand our direct loan and guarantee services.  Because our target market has been historically underserved by the state-owned and commercial banks in China, we believe there will be a continuously high demand for our services and we will be able to attract a steady flow of borrowers.
 
56

 
 
Also, we believe that we may have the opportunity to acquire other microcredit companies of similar size and scope in Jiangsu province, China.  As a result of such acquisitions, we may expand our geographic coverage by obtaining requisite licenses to do business in other cities in Jiangsu province. We intend to actively pursue acquisition opportunities as they arise, although we currently do not have any binding agreement with any acquisition target and there can be no assurance that we will be able to locate any target or negotiate definitive terms with them.

Competition

The number of microcredit companies in China is increasing rapidly.  According to data compiled by PBOC and released on its website, as of September 2012, there were approximately 5,600 microcredit companies in China The total loan balance from microcredit companies stood at $61.9 billion (RMB 533 billion), and new loans issued to microcredit companies in the year of 2012 hit $30.6 billion (RMB 141.4 billion).  In Jiangsu province, there are about 485 microcredit companies with total paid-in capital of $ 12.81 billion (RMB 79,83 Billion) and total outstanding balance of $ 16.63 billion (RMB 103.6 billion) as of December 31, 2012 according to PBOC.
 
In the city of Wujiang, to our knowledge, the Finance Office of Suzhou Government will not approve the establishment of any new microcredit companies in the near future, and therefore the competition among the current eleven microcredit companies for new companies may be fierce.  According to the data from Central Bank of China, our major competitors in the city of Wujiang as of the end of February 2012 are listed below (in million Dollars).
 
Entities
 
Direct Loan Portfolio
 
Guarantee Portfolio
 
Total Portfolio
Dongfang
 
124.58
 
60.43
 
185.01
Sunan
 
84.68
 
86.23
 
170.91
Wujiang Luxiang
 
75.73
 
91.36
 
167.09
Tongli
 
154.86
 
3.64
 
158.5
Sushang
 
83.1
 
60.97
 
144.07
Wuyue
 
104.56
 
21.11
 
125.67
Tenglv
 
96.65
 
0
 
96.65
Jinguo
 
81.53
 
7.12
 
88.65
Lili
 
64.04
 
0
 
64.04
Jinxin
 
42.59
 
11.38
 
53.97
Fenghu
 
47.33
 
6.33
 
53.66
 
Competitive Strengths
 
We believe there are several key factors that will continue to differentiate us from other microcredit companies in the City of Wujiang.

       
Experienced Management Team.   We have a senior management team that has time-tested, hands-on experience with a high degree of market knowledge and a thorough understanding of the lending industry in China. Mr. Huichun Qin, our CEO and one of the founders of Wujiang Luxiang, worked at the Suzhou Sub-Branch of PBOC from 1981 to 2008, where he served as deputy director of Accounting Finance Section from 1993 to 2008.  Mr. Qin also served as a deputy director at Jiangsu Branch of SAFE from 2006 to 2008.  Other members of our management team have an average of 25 years of previous banking, accounting or other relevant experience. We believe that our management’s significant experience in the lending industry and our efficient underwriting process allow us to more accurately judge to whom to lend to and how to structure the loan.
 
 
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Stable Relationship with State-Owned Banks and Commercial Banks.  We have established relationships with local branches of the state-owned and provincial commercial banks.  We currently have a credit facility agreement with Agricultural Bank of China pursuant to which it extended a line of credit to us, and other state owned banks are interested in extending credit to us. We also have established guarantee cooperation relationships with China Construction Bank, Agricultural Bank of China, Bank of Communications, China CITIC Bank, Agricultural Commercial Bank and Jiangsu Bank pursuant to which these banks previously have agreed to accept us as a guarantor for third party loans. Although there is no written understanding between these banks and us with regard to referral of lending business, we believe that the reputation of our management team enables us to maintain and develop good relationships with the local branches of these state owned and commercial banks.

       
Early Entrance and Good Reputation.  We are one of the first microcredit companies approved in the City of Wujiang. We have strong market recognition among the small borrowers in the City of Wujiang, which we believe should translate into a steady flow of borrowers.

       
Stable Borrower Base. Due to our early entrance that resulted in sizeable market share, we retain a stable borrower base with recurring borrowing needs and good repayment track records.
  
We believe we have the following competitive strengths compared to the local branches of state-owned banks and commercial banks who are permitted to extend credit to microcredit companies.

       
Fast Service.  We can close loans more quickly than traditional Chinese banks due to our efficient, yet stringent, underwriting process and a less bureaucratic environment, which is friendlier to SMEs, farmers and individuals.