F-1/A 1 d451527df1a.htm AMENDMENT NO. 2 TO FORM F-1 AMENDMENT NO. 2 TO FORM F-1
Table of Contents

As filed with the Securities and Exchange Commission on November 30, 2018

Registration No. 333-225438

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2 TO

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Cornerstone Management, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

 

British Virgin Islands    6282    Not applicable
(State or Other Jurisdiction of    (Primary Standard Industrial    (I.R.S. Employer
Incorporation or Organization)    Classification Code Number)    Identification Number)

c/o Guangzhou Cornerstone Asset Management Co., Ltd.

49F, Guangzhou CTF Finance Centre

No. 6 Zhujiang East Road, Zhujiang New Town, Tianhe, Guangzhou

Guangdong Province, 510032, PRC

Tel: +86-20-3891-7643

(Address, including zip code, and telephone number, including area code, of principal executive offices)

 

 

Law Debenture Corporate Services Inc.

801 2nd Avenue, Suite 403

New York, New York 10017

+1-217-750-6474

(Name, address, including zip code, and telephone number, including areas code, of agent for service)

 

 

Copies to:

 

Kefei Li, Esq.    Richard I. Anslow, Esq.
Sidley Austin LLP    Ellenoff Grossman & Schole LLP
Suite 608, Tower C2, Oriental Plaza    1345 Avenue of the Americas

No. 1 East Chang An Avenue, Dong Cheng District

Beijing 100738, People’s Republic of China

  

New York, New York 10105

Tel: (212) 370-1300

Tel: +86-10-5905-5588   

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this Registration Statement becomes effective.

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, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) 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.  ☐

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.  ☐

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.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. Emerging growth company.  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

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 Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price (1)

 

Amount of

Registration Fee (3)

Ordinary shares, par value $0.001 per share(2)

  $20,000,000   $2,490

 

 

(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(a).

(2)

In accordance with Rule 416(a), the Registrant is also registering an indeterminate number of additional ordinary shares that shall be issuable pursuant to Rule 416 to prevent dilution resulting from share splits, share dividends or similar transactions.

(3)

Previously paid.

 

 

 


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The information in this prospectus is not complete and may be changed. We 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 is not soliciting an offer to buy these securities in any state or other jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED NOVEMBER 30, 2018

LOGO

Cornerstone Management, Inc.

5,000,000 Ordinary Shares

This is the initial public offering of Cornerstone Management, Inc. We are offering 5,000,000 ordinary shares. We expect that the initial public offering price will be $4.00 per ordinary share.

No public market currently exists for our ordinary shares. We have reserved the symbol “CSCA” for listing on the NASDAQ Capital Market of the ordinary shares we are offering. We believe that upon the completion of the offering contemplated by this prospectus, we will meet the standards for listing on the NASDAQ Capital Market.

We are an “emerging growth company” as defined in the Jumpstart Our Business Act of 2012, as amended, and, as such, will be subject to reduced public company reporting requirements.

An investment in our securities is highly speculative, involves a high degree of risk and should be considered only by persons who can afford the loss of their entire investment. See “Risk Factors” beginning on page 16 of this prospectus.

THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS ILLEGAL FOR ANY PERSON TO TELL YOU OTHERWISE.

 

     Per
Share
     Total  

Initial public offering price

   $ 4.00      $ 20,000,000  

Underwriting discounts and commissions (1)

   $ 0.32      $ 1,600,000  

Proceeds to us, before expenses

   $ 3.68      $ 18,400,000  

 

(1)

The underwriter will receive compensation in addition to such discount and commissions as set forth under “Underwriting.”

We expect our total cash expenses for this offering (including cash expenses payable to our underwriter for its out-of-pocket expenses) to be approximately $1,567,558 exclusive of the above commissions. In addition, we will pay additional items of value in connection with this offering that are viewed by the Financial Industry Regulatory Authority, or FINRA, as underwriting compensation. These payments will further reduce proceeds available to us before expenses. See “Underwriting.”

This offering is being conducted on a firm commitment basis. The underwriter, ViewTrade Securities Inc., is obligated to take and pay for all of the shares if any such shares are taken. We have granted the underwriter an option for a period of 45 days after the closing of this offering to purchase up to 15% of the total number of our ordinary shares to be offered by us pursuant to this offering (excluding shares subject to this option), solely for the purpose of covering over-allotments, at the initial public offering price less the underwriting discount. If the underwriter exercises the option in full, the total underwriting discounts and commissions payable will be $1,840,000 based on an offering price $4.00 per share, and the total proceeds to us, before expenses, will be $21,160,000. If we complete this offering, net proceeds will be delivered to our company on the closing date. We will not be able to use such proceeds in China, however, until we complete capital contribution procedures which requires prior approval from each of the respective local counterparts of MOFCOM, SAIC and SAFE (as defined herein) in China. See remittance procedures in the section titled “Use of Proceeds” beginning on page 51.

The underwriter expects to deliver the ordinary shares against payment as set forth under “Underwriting”, on or about             , 2018.

VIEWTRADE SECURITIES INC.

LOGO

Prospectus dated            , 2018


Table of Contents

TABLE OF CONTENTS

 

Prospectus Summary

     1  

The Offering

     12  

Summary Consolidated Financial Data

     14  

Risk Factors

     16  

Special Note Regarding Forward-looking Statements

     49  

Use of Proceeds

     51  

Dividend Policy

     52  

Exchange Rate Information

     53  

Capitalization

     54  

Dilution

     55  

Selected Consolidated Financial Data

     56  

Post-Offering Ownership

     58  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     59  

Industry

     81  

Corporate History and Structure

     89  

Our Business

     93  

Regulation

     114  

Management

     123  

Related Party Transactions

     130  

Principal Shareholders

     131  

Description of Share Capital

     134  

Shares Eligible for Future Sale

     143  

Tax Matters Applicable to U.S. Holders of Our Shares

     145  

Enforceability of Civil Liabilities

     151  

Underwriting

     152  

Expenses Related to this Offering

     156  

Legal Matters

     157  

Experts

     157  

Where You Can Find Additional Information

     157  

Index to Consolidated Financial Statements

     F-1  

Until            , 2018 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

You should rely only on the information contained in this prospectus and any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriter has not, authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus and any related free writing prospectus. We and the underwriter take no responsibility for, and can provide no assurances as to the reliability of, any information that others may give you. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is only accurate as of the date of this prospectus, regardless of the time of delivery of this prospectus and any sale of our ordinary shares. Our business, financial condition, results of operations and prospects may have changed since that date.


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PROSPECTUS SUMMARY

This summary highlights information that we present more fully in the rest of this prospectus. This summary does not contain all of the information you should consider before buying ordinary shares in this offering. You should read the entire prospectus carefully, including the “Risk Factors” section and the financial statements and the notes to those statements. In addition, this prospectus contains information from a market research report prepared by China Insights Consultancy, or CIC, an independent industry consultant (the “CIC Report”) which was commissioned by us to provide information on the private equity industry in China.

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented on a pro-forma basis to reflect a share redemption through a one-for-zero point seven one (1 for 0.71) reverse stock split of the issued and outstanding ordinary shares effected on October 29, 2018.

Our Business

We are a private equity fund manager in China primarily engaged in the management of private equity funds. Currently, we focus our investments primarily on China-based companies that are publicly listed or seeking to list in the United States, often referred to as U.S. China concepts stocks, particularly companies in the TMT sector such as new economy companies (as defined herein). Our investments in such companies comprise all stages of the investment cycle: pre-IPO investments, IPO subscriptions, post-IPO secondary market investments (most often in the form of PIPE transactions) and privatizations. As we are a relatively young private equity fund manager in China with a limited operating history, our current business model is to identify investment targets first and raise capital to fund targeted transactions on a deal-by-deal basis as opposed to calling capital from committed investors. We believe that this model enables us to attract a large number of potential investors and raise capital quickly and efficiently as we are already able to present such potential investors with relatively detailed information on the pre-screened investment targets, thereby enhancing their confidence in the fund. As the investment targets are pre-identified, our ability to raise capital within a shorter period of time is critical to our ability to close the investment, which, in the longer term, is important to our reputation in China’s financial industry as well as our ability to raise capital to fund future investments. To date, we have been able to successfully close funding rounds for each of our funds generally within a short period of two to three months from the signing of a term sheet with our investment targets. During the fundraising process, we provide potential investors with information about our investment targets, including certain details in the signed term sheets such as a proposed investment target’s industry background, competitive strengths, performance history, and current stage in the investment cycle. We also provide third-party investors with financial advisory services, which primarily include identifying suitable target investment projects that fit the specific investment needs of investors based on our expertise, market resources, internal database and professional relationships with our industry peers.



 

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We generate revenue primarily from the provision of fund management services and financial advisory services. The following table sets forth a breakdown of our revenue for the periods indicated:

 

     For the Year Ended
March 31,
    For the Year Ended
March 31,
    For the Three
Months Ended
June 30,
 
     2017     %     2018     %     2018     %  

Fund management services

            

Subscription fees

   $ 876,120       13.6   $ 2,917,427       22.9   $ 155,038       0.7

Management fees

     473,797       7.4     4,418,873       34.6     2,076,084       9.2

Realized carried interest

                 2,138,305       16.7     546,863       2.4

Unrealized carried interest

     1,617,201       25.1     2,580,508       20.2    
19,833,846
 
    87.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     2,967,118       46.1     12,055,113       94.4     22,611,831       100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial advisory services

     3,476,090       53.9     711,428       5.6            
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

   $ 6,443,208       100.0   $ 12,766,541       100   $ 22,611,831       100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We currently manage four categories of funds and one individual fund under our equity investment portfolio. The following table provides an overview of the performance of these funds as of and for the periods indicated:

 

    As of March 31, 2017           As of March 31, 2018           As of June 30, 2018              
    AUM     Total Amount of Returns           AUM     Total Amount of Returns           AUM     Total Amount of Returns              
    RMB
(in million)
    $
(in million)
    RMB
(in million)
    $
(in million)
    Net Annualized
Return from
Fund Inception
Date to
March 31, 2017
    RMB
(in million)
    $
(in million)
    RMB
(in million)
    $
(in million)
    Net Annualized
Return(1) from
Fund Inception
Date to
March 31, 2018
    RMB
(in million)
    $
(in million)
    RMB
(in million)
    $
(in million)
    Net Annualized
Return(1) from
Fund Inception
Date to
June 30, 2018
    Net IRR(2)  

East Value(3)

    366.2       55.3       44.4       6.7       42.1     2,352.3       355.5       45.5       6.9       3.1     2,895.3       437.5       764.8       115.6       38.5     39.9

Value Return

    336.4       50.8       4.2       0.6       1.9     473.3       71.5       1.1       0.2       0.1     494.0       74.7       21.8       3.3       2.4     2.3

Unicorn

    N/A       N/A       N/A       N/A       N/A       174.5       26.4       (24.5     (3.7     (293.5 %)      188.5       28.5       (25.8     (3.9     (17.2 %)      (16.8 %) 

Quantitative Hedging Funds(4)

    N/A       N/A       N/A       N/A       N/A       N/A       N/A       0.2       0.0       4.1     8.0       1.2       (0.4     (0.1     (4.2 %)      (4.1 %) 

Culture & Education

    49.3       7.5       (16.8     (2.5     (87.3 %)      42.0       6.3       (24.1     (3.6     (24.0 %)      43.5       6.6       (22.6     (3.4     (19.3 %)      (21.1 %) 

 

Note:

 

(1)

Net annualized return is calculated by averaging the total return on a yearly basis, net of all fees and expenses. Total return represents changes in the net asset value of the relevant fund calculated by comparing changes in the net asset value as of the last date of the period with that as of the fund inception date. For fund categories, annual return represents the asset-weighted average of the yearly return for all funds falling within that category. The fluctuations in net annualized return of each of the funds set out in this table were mainly attributable to the performance of the respective funds and the general market trends during the corresponding period.

 

(2)

Net internal return rate (“IRR”) represents the annualized IRR for the period indicated on investor invested capital based on contributions, distributions and unrealized value after management fees and expenses.

 

(3)

We exited our investment in East Value series under our East Value category of funds in October 2017 before the terms of the relevant funds expired. In addition, we dissolved and liquidated investments under our East Value II series under the East Value fund category in the second quarter of 2018 upon expiration of the term.

 

(4)

As of March 31, 2017, no fund was established under this category. In July 2017, Asset Quantitative Hedging Strategy Fund I was established under this category with a term of six months. We dissolved this fund and liquidated its investments in January 2018 upon expiration of the term. We established Alfat II Quantitative Investment Private Fund under this category in April 2018.



 

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For the years ended March 31, 2017 and 2018 and the three months ended June 30, 2018, we raised funds totaling $102.2 million, $366.5 million and $16.1 million, respectively. Since June 30, 2018, we established five new funds, raising a total capital of $84.7 million. See “— Recent Developments.”

As part of our investment approach that is centered on creating value for our clients and partners, currently we focus our private equity investments primarily on U.S. China concepts stocks, particularly on companies in the TMT sector such as new economy companies, when selecting our portfolio companies. According to the CIC Report, China has seen a growing emergence of start-ups in sectors such as AI, green technologies and e-commerce, driven by the recent policy updates of the PRC government that emphasize technology and innovation, entrepreneurship and environmental protection, among other areas.

While our target investments are not restricted to specific sectors and we may in future expand our fund portfolio to include other industries, we believe that China’s TMT sector in particular will continue to experience rapid growth in the foreseeable future in line with such national policies, and we intend to capitalize on investment opportunities created by the expected growth in this sector. See “Industry—Private Equity in China—U.S. China Concepts Stocks” for details.

Our Investor Base

We believe that our strong investor base lends credibility to our brand and reputation as well as enhances our capital raising capabilities. Our clients primarily include a growing number of high income individuals in China with an annual salary of RMB500,000 (approximately $75,000) and above. Our total active high income individual client base has increased since our inception in August 2015 to 426 and 1,449 as of March 31, 2017 and 2018, and remained relatively stable at 1,407 as of June 30, 2018. Our investor base also includes several major institutional investors in China. As of June 30, 2018, our individual investors and institutional investors accounted for 97.9% and 2.1% of our total number of investors, respectively, and contributed 83.9% and 16.1% of our total raised capital, respectively. Moreover, as of June 30, 2018, investors that had invested in two or more of our funds since our inception accounted for approximately 9.7% of our total investors. We believe that the number of our multi-fund investors and our ability to raise successor funds under existing portfolios and strategies demonstrate the stability and loyalty of our investor base. To date, substantially all of our investors are PRC nationals or entities and none of our investors, whether individual or institutional, represented 10% or more of our total investment funds in terms of amount of raised capital.

Our Investment Professionals

We work for our fund investors by investing their wealth in companies that we believe offer a strong combination of quality, growth, yield and valuation. As of June 30, 2018, we had a team of 18 investment professionals from our investment research department and funds operations department that is experienced in identifying attractive investment opportunities, analyzing the performance of markets and managing our portfolio of equity funds within our risk management and control framework. Fostering an investment culture that is rooted in servicing client relationships, we seek to deliver attractive returns while managing risks. Our investment professionals have continued to select quality, potentially high-growth companies for inclusion in our portfolio by leveraging their knowledge, understanding of China-based companies, domestic investors, demands and overseas markets by leveraging their knowledge, understanding of China-based companies, domestic investors’ demands and overseas markets, including primarily those in the United States. Mr. Xu He, our chief executive officer, and Mr. Xiaoyang Zhuang, our chief financial officer, as the leaders of our investment professionals, have a sound understanding of the investment environment in the United States, regulatory requirements and management of U.S. China concepts stocks. We believe that the collective experience and



 

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industry expertise of our investment professionals are key factors that have enabled us to achieve rapid and significant growth since our inception as well as generate attractive returns on relatively short-term investments for our fund investors.

Investment Process and Risk Management

We generally source and identify potential investment targets through our extensive network of private investors, financial institutions, corporate partners, third-party financial advisors who provide financial advisory to target companies on many of our private equity deals, and other financial intermediaries in China. These parties have contributed to our deal flow by providing us with leads in identifying potential quality investment targets and generating investment opportunities for us.

We maintain a rigorous investment process and a comprehensive risk management system across all of our funds. To ensure proper management of our investments and risks to which we are exposed, we have established a Risk Control Committee and Investment Decision-making Committee. Members of these two committees mainly include Mr. Xu He, our chief executive officer, Mr. Xiaoyang Zhuang, our chief financial officer, our sales director and investment director. We also have one independent financial manager on our Investment Decision-making Committee. Each investment opportunity that is sourced is initially evaluated by our investment research department prior to being submitted for an internal review and approval process, which involves a three-tiered project investment review and decision-making process. Projects that are not approved by the Risk Control Committee will not be submitted to the Investment Decision-making Committee for consideration, and investments that are not approved by the Investment Decision-making Committee will not proceed. We also adopt certain investment policies and procedures in managing various risks applicable to our business, including market, operational, credit, liquidity and ethical risks. In addition, we conduct post-investment risk control activities, including routine follow-up, management by exception and decision-making for major issues, to minimize our risk exposure.

Our Performance Record

For the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2018, our total revenue amounted to $6.4 million, $12.8 million and $22.6 million, respectively. Our net income amounted to $2.7 million, $2.9 million and $10.2 million, respectively, for the same periods.

Our Industry

China has become one of the fastest growing nations in the world in terms of total wealth. At approximately $29 trillion in 2017, China’s total wealth held by households was the largest in Asia, and the second largest in the world as measured by household wealth, according to the CIC Report. China’s population of high income individuals, which the CIC Report defines as those earning an annual salary of RMB500,000 (approximately $75,000) and above, was approximately RMB6.7 million in 2017, having grown at an annual growth rate between 7% and 10% over the past few years.

Continued developments in the economic environment in China over the years and the rise of China’s private wealth have led a greater number of high income investors to seek investments that are more tailored to their individual needs, propelling the growth of financial services such as alternative asset management services, including private equity fund management services. As a result, China’s private equity industry has experienced significant growth over the years, with an increase in AUM of more than RMB8.5 trillion ($1.3 trillion) from



 

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2015 to 2017 by private equity funds in China, which grew in number from 8,846 in 2015 to 66,418 in 2017, according to the CIC Report. According to the same source, following tightened governance over private equity firms and heightened qualification requirements implemented by the AMAC in 2016 in an effort to raise industry standards, China saw a sharp decline in the number of private equity firms registered with the AMAC, when more than 9,000 private equity firms lost their qualifications between March and July of 2016; however, the decline in number of private equity firms did not slow the growth in total AUM by private equity firms in China. As of December 2017, the country’s total AUM by private equity firms reached RMB11.1 trillion ($1.7 trillion).

With China experiencing a rapid rise in private wealth, many high income individuals together with institutional investors, are increasingly seeking to make offshore investments for currency hedge purposes. According to the CIC Report, the U.S. capital markets have become especially appealing to China-based investors because: (i) these markets are well-developed with a sophisticated institutional investor base; (ii) the United States has been a popular listing venue for high-growth China-based companies, or U.S. China concepts stocks, with which Chinese investors are familiar; and (iii) the U.S. stock markets have historically offered more stable and better returns than China’s stock markets. As China’s economy continues its stable growth momentum, we believe that U.S. China concepts stocks are expected to maintain their upward trajectory for the next few years, creating significant and attractive investment opportunities. In particular, companies in the TMT sector, such as new economy companies, are expected to achieve high performance, driven by recent policy updates in which the PRC government has emphasized technology and innovation, entrepreneurship and environmental protection, among other areas. See “Industry — Private Equity in China — U.S. China Concepts Stocks” for details.

There are limited options for China-based investors to access foreign markets like the United States, however, due to stringent measures implemented by the State Administration of Foreign Exchange (“SAFE”), China’s foreign exchange regulator, to restrict currency exchange and curb outbound capital. One of the few channels enabling capital outflow is the Qualified Domestic Institutional Investor (“QDII”) program, under which only financial institutions approved by competent authorities as licensed QDIIs are granted a foreign exchange quota by SAFE and permitted to invest in and manage foreign securities. By the end of 2017, a total of $90.0 billion had been approved under the QDII program and this number was further increased to $98.3 billion in April 2018. The QDII quota is allocated among five different types of QDIIs, namely, insurance companies, banks, trusts, securities companies and fund managers. Fund managers, such as private equity firms, operating in China who do not qualify as a QDII will typically structure their overseas investments by investing proceeds from their private equity funds into investment plans (in the form of asset management plans, trust plans or other types of plans) established by approved QDIIs in China, or QDII plans, which would then invest in the target investments. According to the CIC Report, because the QDII program is directly monitored by SAFE and competition for QDII plans issued by licensed QDIIs is intense, approved QDIIs are generally selective of private equity firms with which they collaborate to execute their investment plans and will typically consider factors such as track record, market reputation, capital resources, investor base and management team, when evaluating and choosing such private equity firms. According to the same source, as investors in China look increasingly to invest their wealth overseas, private equity firms that are able to provide investors in China with a channel to purchase U.S. equity securities, such as through the QDII plans, will have significant opportunities to capitalize on their access to the U.S. capital markets and to gain a competitive advantage over other asset managers in China who do not have such capabilities.

According the CIC Report, the following are key factors contributing to the success of private equity funds in China that invest in overseas markets:

 

   

Fundraising capabilities. The ability to raise sufficient capital and to raise it quickly whenever a fund manager has identified a target company with strong potential for high returns on investment would enable a fund manager to secure good investment opportunities and build a strong portfolio of assets.



 

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Knowledge and understanding of overseas markets. As China-based investors look increasingly to diversify their investment portfolios and risk allocation by purchasing more overseas assets, private equity funds that possess channels for outbound investments will be afforded significant opportunities. Moreover, in order to invest offshore successfully, fund managers must possess a sound understanding of and experience with the investment environment in overseas markets.

 

   

Strong management capabilities. To ensure the growth of a portfolio company, the investment team of a fund must possess experience working closely with the portfolio company’s management and have a keen understanding of such company’s business, financials, industry and other aspects of its operations.

 

   

Available resources. Having strong and available resources, such as a broad investor base and network of industry professionals and intermediaries, access to industry experts, and knowledge of the latest market trends and industry updates, is critical not only for securing investment opportunities but also for exiting existing investments.

Our Relationships with QDIIs

To comply with PRC laws, we have structured our overseas investments by investing proceeds from our funds into investment plans established by approved QDIIs in China, or QDII plans, which would then invest in the target investments. Each of our QDII plans is unique and specifically designated to us. Under our arrangement with the QDII, we generally present highly detailed investment proposals to the QDIIs specifying our investment preferences, including with respect to investment scope and investment target. We also actively assist on various aspects of investment analysis and execution, including market research, identifying target portfolio companies, performing due diligence on the markets and industries, negotiating investment terms, advising on investment strategies and risk management procedures. We may also propose the timing of exits to the QDII. Under each QDII plan, we negotiate with the relevant QDII to obtain an investment amount that meets our specific needs for the investment proposal under such QDII plan, and we typically do not seek to obtain an investment amount that exceeds our actual needs under such arrangement. Although we believe we have significant influence over the QDII plans, the QDIIs could theoretically disagree with our investment proposals and decide not to invest in our target. See “Risk Factors—Risks Related to Our Business and Industry—If we fail to invest our funds in the QDII plans, or the QDIIs disagree with our investment proposals with respect to the QDII plans, we may be unable to invest in our desired target companies.” We believe that, because of our strong performance record, increasing market recognition, proven capital raising capabilities and long-standing relationships with a number of leading QDIIs in China, we have not encountered any material difficulties in negotiating with approved QDIIs to invest in their QDII plans in order to gain access to overseas markets and, to date, all of the investment decisions made by the QDIIs with respect to the QDII plans in which we have invested have been consistent with our investment proposals to them. See “Our Business—Structure and Operation of Our Investment Funds—Onshore/offshore Structure and QDII.”

Competitive Strengths

We believe that the following competitive strengths differentiate us from our competitors and have contributed to our rapid and significant growth to date:

 

   

unique positioning and demonstrated rapid growth;

 

   

strong performance record and increasing market recognition;

 

   

proven capital raising capabilities;



 

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established industry and corporate relationships; and

 

   

experienced team of investment professionals.

Business Strategies

We intend to create value for our shareholders by:

 

   

identifying exceptional investment opportunities to bolster our strong performance record;

 

   

broadening our base of private investors to expand our capital base;

 

   

growing our assets under management across our fund portfolios by raising new investment funds;

 

   

diversifying our investment portfolio by selecting investment portfolio companies from other industries and regions;

 

   

developing nationwide business operations and coverage by expanding our sales, marketing and fund management teams; and

 

   

strengthening our brand and market reputation to become a leading boutique private equity fund manager.

Recent Developments

Since June 30, 2018, we established five new funds, including two funds under Cornerstone East Value IX series and two funds under East Value XI series, with a term of two years each, and Kangze I fund with a term of three years. We raised a total capital of approximately $84.7 million from these new funds. We also have additional proposed funds at the fundraising stage.

On November 10, 2018, chairman of the board and the chief executive officer of China Customer Relations Centers, Inc. (NASDAQ: CCRC), or CCRC, Mr. Zhili Wang, together with our company, together as the consortium members, jointly submitted a preliminary non-binding proposal with respect to the acquisition of all of the outstanding common shares of CCRC that are not already held by the consortium members. The consideration payable for each common share of CCRC to be acquired is proposed to be $16.0 per common share in cash. The consortium members of the proposed CCRC acquisition intend to finance the transaction with a combination of equity and debt capital in the form of rollover equity in CCRC and cash contributions from the consortium members and other sponsors. We plan to establish a new fund to raise capital for the proposed CCRC acquisition, and do not plan to use any of the proceeds from this offering for that purpose.

Our Challenges and Risks

Our ability to achieve our goals and execute our strategies is subject to risks and uncertainties, including those associated with:

 

   

our limited operating history;

 

   

the potential volatility of our revenue, net income and cash flow;

 

   

the potential for poor performance of our investment funds;

 

   

adverse economic and market conditions, which could negatively impact our business in many ways, including by reducing the value or performance of the investments made by our investment funds, reducing the ability of our investment funds to raise or deploy capital, and impacting our liquidity position;

 

   

the fact that our funds invest in relatively high-risk assets, and the performance of our funds may be adversely affected by the financial performance of our portfolio companies and the industries in which our funds invest;



 

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the risks inherent to private equity investing;

 

   

our significant dependence on third-party investors to raise capital for our funds;

 

   

our heavy reliance on our relationships with financial institutions and corporate partners in China;

 

   

our failure to invest our funds in the QDII plans, or any disagreement by the QDIIs with our investment proposals with respect to the QDII plans, which may render us unable to invest in our desired target companies;

 

   

our dependence on our founding members and other key personnel;

 

   

our ability to adapt to changes in laws and regulations governing the private equity industry in China;

 

   

our use of a variable interest entity, or VIE, to operate our private equity businesses.

Please see “Risk Factors” for a detailed discussion of these and other factors you should consider before making an investment in our ordinary shares.

Corporate Information

Cornerstone Management, Inc. was incorporated in the British Virgin Islands on July 5, 2017, with an authorized capital of 300,000,000 shares, par value of $0.001 per share. Our principal executive offices are located at 49F, Guangzhou CTF Finance Centre, No. 6 Zhujiang East Road, Zhujiang New Town, Tianhe District, Guangzhou, Guangdong Province, 510032, PRC. Our telephone number is +86-20-3891-7643. Our registered office in the British Virgin Islands is located at Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands.

Our main website is www.cscapital.cc. The information contained on our website is not a part of this prospectus.

Corporate History and Structure

We commenced business of management of corporate private equity funds in 2015. On August 3, 2015, our operating entity, Guangzhou Cornerstone Asset Management Co., Ltd., or CSC Guangzhou, was incorporated in Guangzhou, PRC, with registered capital of RMB 10 million. On May 25, 2017, Guangzhou Cornerstone Investment Management Co., Ltd. was incorporated in Guangzhou, PRC. It is wholly owned by CSC Guangzhou, and it maintains registered capital of RMB 10 million.

In 2017, we restructured our holding structure to facilitate offshore listing. On July 5, 2017, our company, Cornerstone Management, Inc., was incorporated in the British Virgin Islands, with the authorized capital of 300,000,000 shares, par value of $0.001 per share.

On August 8, 2017, CSC Management Ltd., or CSC HK, was incorporated in Hong Kong as a wholly-owned subsidiary of Cornerstone Management Inc.

On September 8, 2017, Guangzhou Cornerstone Corporate Consulting Co., Ltd., our WFOE, was incorporated in Guangzhou, PRC, with registered capital of RMB 5 million, as a wholly-owned subsidiary of CSC HK.



 

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On October 12, 2017, WFOE entered into a serial of contractual arrangements with the shareholders of CSC Guangzhou, through which WFOE has gained full control over the management and receive the economic benefits of CSC Guangzhou. See “— Contractual Arrangements.”

The following diagram illustrates our corporate structure, including our material subsidiaries, interests and consolidated variable interest entities as of the date of this prospectus:

 

LOGO

 

(1)

CSC Guangzhou is held directly by the following individuals: Mr. Xu He as to 37.5%; Ms. Qin Wu as to 37.5%; Mr. Tao Lin as to 5%; Mr. Weifeng Luo as to 10%; Mr. Xiaohai Zhuang as to 5%; Ms. Yueqin Zhao as to 3%; and Ms. Meifang Liu as to 2%. Mr. Xu He serves as our director and chief executive officer. Ms. Qin Wu is the mother of Mr. Xiaohai Zhuang and Mr. Xiaoyang Zhuang, and Mr. Xiaoyang Zhuang serves as our director and chief financial officer.

Implications of Being an Emerging Growth Company and a Foreign Private Issuer

We are an “emerging growth company,” as defined in the JOBS Act, and we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including 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 non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have not made a decision whether to take advantage of any or all of these exemptions. If we do take advantage of any of these exemptions, we do not know if some investors will find our ordinary shares less attractive as a result. The result may be a less active trading market for our ordinary shares and the price of our ordinary shares may be more volatile.



 

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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 (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 are choosing to “opt in” to such extended transition period for complying with new or revised accounting standards under Section 102(b)(2) of the JOBS Act, which allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies.

We will remain an “emerging growth company” until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”), which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iv) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

We are incorporated in the British Virgin Islands, and more than 50 percent of our outstanding voting securities are not directly or indirectly held by residents of the United States. Therefore, we are a “foreign private issuer” as defined in Rule 405 under the Securities Act and Rule 3b-4(c) under the Exchange Act. As a result, we are not subject to the same requirements as U.S. domestic issuers. As a foreign private issuer, we may take advantage of certain provisions in the NASDAQ listing rules that allow us to follow British Virgin Islands law for certain corporate governance matters. Under the Exchange Act, we will be subject to reporting obligations that, to some extent, are more lenient and less frequent than those of U.S. domestic reporting companies. For example, we will not be required to issue quarterly reports or proxy statements. We will not be required to disclose detailed individual executive compensation information. Furthermore, our directors and executive officers will not be required to report equity holdings under Section 16 of the Exchange Act and will not be subject to the insider short-swing profit disclosure and recovery regime.

Conventions that Apply to this Prospectus

Unless otherwise indicated or the context otherwise requires, references in this prospectus to:

 

   

“CAGR” refers to compound annual growth rate;

 

   

“China” or the “PRC” refers to the People’s Republic of China, excluding, for the purpose of this prospectus only, Hong Kong special administrative region, Macau special administrative region and Taiwan;

 

   

“CIC” refers to China Insights Consultancy Limited, the industry consultant;

 

   

“Cornerstone Management,” “we,” “us,” “our company,” and “our” refer to Cornerstone Management, Inc. and its subsidiaries and consolidated entities;

 

   

“EIT” refers to PRC enterprise income tax;

 

   

“high income individual” refers to individual investors earning an annual salary of RMB500,000 (approximately $75,000) in China;



 

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“MOFCOM” refers to the Ministry of Commerce of the PRC;

 

   

“new economy companies” refer to high-growth, asset-light companies in the TMT sector that focus on using internet technologies, information technologies, green technologies and other related technologies to create new products and services;

 

   

“PIPE” refers to private investment in public equity;

 

   

“QDII” refers to Qualified Domestic Institutional Investor;

 

   

“RMB” and “Renminbi” refer to the legal currency of China;

 

   

“SAFE” refers to the State Administration of Foreign Exchange;

 

   

“TMT sector” refers to the telecommunications, media and technology sector and includes new economy companies;

 

   

“US$,” “U.S. dollars,” “$” and “dollars” refer to the legal currency of the United States; and

 

   

“VIE” refers to variable interest entity.

Our reporting currency is the U.S. dollar. This prospectus contains translations of certain foreign currency into U.S. dollars for the convenience of the reader. The conversion of Renminbi into U.S. dollars in this prospectus is based on the rate certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, all translations from Renminbi to U.S. dollars have been made at the rate as of the end of the applicable period, that is, RMB6.6171 to $1.00, the noon buying rate in effect as of June 29, 2018. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus should have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On November 23, 2018, the noon buying rate for Renminbi was RMB6.9477 to $1.00. See “Risk Factors — Risks Related to Our Business and Industry — Our profitability may be seriously affected by fluctuations in exchange rates between the Renminbi and the U.S. dollar.”

In addition, unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option.



 

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THE OFFERING

 

Ordinary shares offered

5,000,000 shares

 

Over-allotment Option

We have granted the underwriters 45 days from the date of this prospectus, to purchase up to an additional 750,000 shares on the same terms as the other shares being purchased by the underwriters from us.

 

Ordinary shares Outstanding before this Offering

148,390,000 shares

 

Ordinary shares to be Outstanding after this Offering

153,390,000 shares

 

Use of Proceeds; Indemnification Escrow Account

We estimate that our net proceeds from this offering will be approximately $16,832,442, based on an assumed initial public offering price of $4.00 per share, and after deducting estimated underwriting discounts and commissions and estimated offering expenses and assuming no exercise of the over-allotment option granted to the underwriters. We plan to use the net proceeds of this offering primarily to support the expansion of our operations and for general corporate purposes, which may include hiring additional sales, marketing and fund management personnel, and investing in sales and marketing activities, capital expenditures and other general and administrative matters. In addition, approximately $500,000 of the net proceeds will be used to fund an escrow account to indemnify the underwriters, which sum could be returned to us after two years from the date of this offering.

 

  The net proceeds from this offering must be remitted to China before we will be able to use such funds for our business. See “Use of Proceeds.”

 

Lock-up agreements

Our executive officers, directors, and the holders of our currently outstanding ordinary shares will execute lockup agreements, pursuant to which, (1) each of Mr. Xu He, Fundament Limited and Dawnlight Limited, for a period of 24 months; (2) Henz Real Estate Development Limited for a period of six months; and (3) each of other executive officers, directors and existing stockholders, for a period of 12 months, respectively, following the closing of this offering, agrees not to sell, transfer or dispose of any shares or similar securities. See “Shares Eligible for Future Sale” and “Underwriting” for more information.

 

Share Escrow Plan

We plan to enter into a share escrow agreement in connection of this offering under which, with the exception of Henz Real Estate Development Limited, our shareholders as of the date of this prospectus will agree to place 95% of their ordinary shares in an



 

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escrow account held by the escrow agent (the “Share Escrow Plan”). Under the Share Escrow Plan, all of the escrowed shares will be released if our net income (excluding the impact of any compensation expense as a result of the implementation of the Share Escrow Plan) for any fiscal year during the three years ended March 31, 2021 meets a target of approximately $28.8 million in net income, provided that if such target is not met, the escrowed shares will be released based on actual net income achieved and conditions set forth in the share escrow agreement. See “Shares Eligible for Future Sale—Share Escrow Plan”. We estimate that we will incur significant compensation expenses in connection with the release of 49.8% of escrowed shares beneficially owned by certain of our directors, officers and employees. The Share Escrow Plan will terminate on the earlier of (a) such time when all of the escrowed shares have been released, and (b) the end of 30th day after the filing of the annual report for the fiscal year ending March 31, 2021. Any escrowed shares that have not been released will be cancelled upon the termination of the Share Escrow Plan. See “Risk Factors—Risks Related to this Offering and Ownership of our Ordinary Shares—We are subject to certain risks in connection with the Escrow Plan” and “Shares Eligible for Future Sale” for more information.

 

NASDAQ Trading symbol

We have applied for the listing of our ordinary shares on the NASDAQ Capital Market under the reserved symbol “CSCA”.

 

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 of this prospectus before deciding to invest in our ordinary shares.


 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated statements of income and comprehensive income data for the years ended March 31, 2017 and 2018, and summary consolidated balance sheets data as of March 31, 2017 and 2018 and summary consolidated cash flow data for the years ended March 31, 2017 and 2018 which have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of income and comprehensive income data for the three months ended June 30, 2017 and 2018, and summary consolidated balance sheets data as of June 30, 2018 and summary consolidated cash flow data as of June 30, 2017 and 2018 which have been derived from our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. Our consolidated financial statements are prepared and presented in accordance with the generally accepted accounting principles in the United States of America, or U.S. GAAP. You should read this Summary Consolidated Financial Data and Summary Operating Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results are not necessarily indicative of results expected for future periods.

Summary Consolidated Statements of Income and Comprehensive Income Data:

 

     For the year ended March 31,      For the three months ended June 30,  
     2017     2018      2017      2018  

Revenue

          

Financial advisory fees

   $ 3,476,090     $ 711,428      $ 687,546      $  

Subscription fees

     876,120       2,917,427        499,438        155,038  

Management fees

     473,797       4,418,873        469,285        2,076,084  

Realized carried interest

           2,138,305               546,863  

Unrealized carried interest

     1,617,201       2,580,508        1,121,594        19,833,846  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total net revenues

     6,443,208       12,766,541        2,777,863        22,611,831  
  

 

 

   

 

 

    

 

 

    

 

 

 

Operation Cost and Expenses

          

Distribution and servicing costs

     1,726,014       4,592,080        535,135        1,557,237  

Carried interest related compensation

     229,161       1,561,803        97,334        6,471,646  

Selling expenses

     502,354       1,291,990        239,779        388,592  

General and administrative expenses

     368,907       1,668,229        247,619        631,693  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total expenses

     2,826,436       9,114,102        1,119,867        9,049,168  
  

 

 

   

 

 

    

 

 

    

 

 

 

Investment Income

          

Net gains from investment activities

           208,480        7,059        55,450  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total Investment income

           208,480        7,059        55,450  
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before income taxes provision

     3,616,772       3,860,919        1,665,055        13,618,113  

Income tax provisions (benefit)

     909,783       975,182        422,447        3,409,296  
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income

   $ 2,706,989     $ 2,885,737      $ 1,242,608      $ 10,208,817  

Other comprehensive income (loss)

          

Foreign currency translation adjustment

     (61,403     428,929        52,407        (694,646
  

 

 

   

 

 

    

 

 

    

 

 

 

Total comprehensive income

   $ 2,645,586     $ 3,314,666      $ 1,295,015      $ 9,514,171  
  

 

 

   

 

 

    

 

 

    

 

 

 

Earnings (losses) per common share*

          

Basic

   $ 0.0182     $ 0.0194      $ 0.0084      $ 0.0688  
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.0182     $ 0.0194      $ 0.0084      $ 0.0688  
  

 

 

   

 

 

    

 

 

    

 

 

 


 

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     For the year ended March 31,      For the three months ended June 30,  
     2017      2018      2017      2018  

Weighted average common shares* outstanding

           

Basic

     148,390,000        148,390,000        148,390,000        148,390,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     148,390,000        148,390,000        148,390,000        148,390,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

The shares are presented on a retroactive basis to reflect our share redemption through a one-for-zero point seven one (1 for 0.71) reverse stock split of our company’s issued and outstanding ordinary shares on October 29, 2018. See note 12 to our consolidated financial statements included herein.

Summary Consolidated Balance Sheets Data:

 

     As of
March 31,
2017
     As of
March 31,
2018
     As of
June 30, 2018
 

Total assets

   $ 7,283,491      $ 25,217,841      $ 44,381,235  

Total liabilities

     4,667,868        18,759,860        28,200,083  

Total stockholders’ equity

     2,615,623        6,457,981        16,181,152  

Summary Consolidated Cash Flow Data:

 

     For the year ended March 31,     For the three months ended June 30,  
     2017     2018     2017     2018  

Net cash provided by (used in) operating activities

   $ 2,740,172     $ 4,049,540     $ (124,293   $ 253,141  

Net cash provided by (used in) investing activities

     (282,696     (1,656,227     (2,089,595     (792,039

Net cash provided by financing activities

     (65,617     520,980       377,144       209,000  

Effect of exchange rate change on cash and cash equivalents

     (59,989     370,374       6,031      
(260,697

Cash and cash equivalents, beginning balance

     62,825       2,394,695       2,394,695       5,679,362  

Cash and cash equivalents, ending balance

   $ 2,394,695       5,679,362               563,982      
        5,088,767
 


 

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RISK FACTORS

Investment in our securities involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this prospectus before making an investment decision. The risks and uncertainties described below represent our known material risks to our business. If any of the following risks actually occurs, our business, financial condition or results of operations could suffer. In that case, you may lose all or part of your investment. You should not invest in this offering unless you can afford to lose your entire investment.

Risks Related to Our Business and Industry

Our limited operating history could make our future performance difficult to predict.

We commenced operations in August 2015 and we established our first fund in January 2016. Accordingly, our operating history is very limited. For the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2018, our revenue totaled $6.4 million, $12.8 million and $22.6 million, respectively. For the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2018, our net profit totaled $2.7 million, $2.9 million, and $10.2 million, respectively. We cannot assure you that our revenue and net profit as well as other aspects of our financial performance will continue to increase at historical rates or at all. Our limited operating history may not provide an adequate basis for you to evaluate our operating and financial results and business prospects and, therefore, past revenue and net income growth experienced by us should not be taken as indicative of our future performance. You should consider our business and prospects in light of the risks, uncertainties, expenses and challenges that we face as an early-stage company.

Our revenue, net income and cash flow are variable, which may make it difficult for us to achieve steady earnings growth from period to period.

Our revenue, net income and cash flow are variable. For example, our cash flow fluctuates due to the fact that we receive carried interest from our funds only when investments are realized and achieve a certain preferred return. We may also experience fluctuations in our results, including our revenue and net income, from period to period due to a number of other factors, including changes in management fees, changes in the carrying values and performance of our funds’ investments that can result in significant volatility in the carried interest that we have accrued (or as to which we have reversed prior accruals) from period to period, as well as changes in the amount of distributions, dividends or interest paid in respect of investments, changes in our operating expenses, the degree to which we encounter competition and general economic and market conditions. The carrying value of fund investments may be more variable during times of market volatility. Such variability in the timing and amount of our accruals and realizations of carried interest and management fees may lead to volatility in the trading price of our shares, and therefore our results and cash flow for a particular period may not be indicative of our performance in a future period. The timing and receipt of carried interest also varies with the life cycle of our funds. Moreover, even if an investment proves to be profitable, it may be a number of years before any profits can be realized in cash (or other proceeds). We cannot predict precisely when, or if, realizations of investments will occur. A downturn in the equity markets also makes it more difficult to exit investments by selling equity securities. If we were to have a realization event in a particular period, the event may have a significant impact on our results and cash flow for that particular period which may not be replicated in subsequent periods.

Poor performance of our investment funds could cause a decline in our revenue, income and cash flow, may obligate us to reverse the accrued carried interest that we previously recognized, and could adversely affect our ability to raise capital for future investment funds.

In the event that any of our investment funds were to perform poorly, our revenue, income and cash flow could decline. A reduction in the value of our AUM in such funds could result in a reduction in management fees and

 

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carried interest we earn. In addition, a reduction in the value of the portfolio investments held in our funds could result in a reversal of accrued carried interest that were previously recognized. In addition, poor performance of our investment funds could make it more difficult for us to raise new capital. Investors might decline to invest in future investment funds we raise. Investors and potential investors in our funds continually assess our investment funds’ performance, and our ability to raise capital for existing and future investment funds will depend on our investment funds’ continued satisfactory performance. Accordingly, poor fund performance may deter future investment in our funds and thereby decrease the capital invested in our funds and ultimately, our management fee income. Alternatively, in the face of poor fund performance, investors could demand lower fees or fee concessions for existing or future funds which would likewise decrease our revenue.

Adverse economic and market conditions could negatively impact our business in many ways, including by reducing the value or performance of the investments made by our investment funds, reducing the ability of our investment funds to raise or deploy capital, and impacting our liquidity position, any of which could materially reduce our revenue and cash flow and adversely affect our financial condition.

We operate and conduct fund raising activities in China. Currently, we focus our investments primarily on China-based companies that are publicly listed or seeking to list in the United States, often referred to as U.S. China concepts stocks, particularly on companies in the TMT sector such as new economy companies. Our business may be materially affected by unfavorable economic or market conditions or events in the world, particularly in China and the United States, that are outside of our control, including but not limited to changes in interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws, trade barriers, commodity prices, currency exchange rates and controls and national and international political circumstances (including wars, terrorist acts or security operations). These factors may affect the level and volatility of securities prices and the liquidity and the value of investments, and we may not be able to or may choose not to manage our exposure to these market conditions and/or other events.

Our funds may be affected by reduced opportunities to exit and realize value from their investments, or by lower than expected returns on investments. In addition, decreased business and investor confidence as well as diminished liquidity and credit availability in the financial markets may impact our ability to secure sufficient capital to close our investments within the required time frame. These and other factors could adversely affect the timing of new funds and our ability to raise new funds or secure future deal flow. During periods of difficult market conditions or slowdowns (which may be across one or more industries or geographies), our funds’ portfolio companies may experience adverse operating performance, decreased revenues, financial losses, difficulty in obtaining access to financing and increased funding costs. Negative financial results in our funds’ portfolio companies may result in lower investment returns for our investment funds, which could materially and adversely affect our ability to raise new funds as well as our operating results and cash flow. During such periods of weakness, our funds’ portfolio companies may also have difficulty expanding their businesses and operations or meeting their debt service obligations or other expenses as they become due, including expenses payable to us. Furthermore, such negative market conditions could potentially result in a portfolio company entering bankruptcy proceedings, thereby potentially resulting in a complete loss of the fund’s investment in such portfolio company or real assets and a significant negative impact on the fund’s performance, which could in turn harm our operating results and cash flow, as well as our reputation.

Our operating performance may also be adversely affected by our fixed costs and other expenses and the possibility that we would be unable to scale back other costs within a time frame sufficient to match any decreases in revenue relating to changes in market and economic conditions. In order to reduce expenses in the face of a difficult economic environment, we may need to cut back or eliminate the use of certain services or service providers, or terminate the employment of a significant number of our personnel that, in each case, could be important to our business and without which our operating results could be adversely affected.

Moreover, during periods of difficult market conditions or slowdowns, our fund investment performance could suffer, resulting in, for example, the payment of reduced or no carried interest to us. Such event could cause our

 

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cash flow from operations to significantly decrease, which could materially and adversely affect our liquidity position and the amount of cash we have on hand to conduct our operations. Having less cash on hand could in turn require us to rely on other sources of cash (such as the capital markets which may not be available to us on acceptable terms) to finance our operations. Furthermore, continued weak market conditions and further adverse trends in the general economic environment may limit our ability to obtain credit facilities when needed or other financing on commercially reasonable terms. As a result, our uses of cash may exceed our sources of cash, thereby potentially affecting our liquidity position.

Our funds invest in relatively high-risk assets, and the performance of our funds may be adversely affected by the financial performance of our portfolio companies and the industries in which our funds invest.

Currently, we focus our investments primarily on U.S. China concepts stocks, particularly on companies in the TMT sector such as new economy companies. Our investments in such companies comprise all stages of the investment cycle: pre-IPO investments, IPO subscriptions, post-IPO secondary market investments (most often in the form of PIPE transactions) and privatizations. China’s technology and related sectors are characterized by rapid technological changes, an evolving regulatory environment and more volatile market conditions. In addition, some of the companies that we invest in are startups, which may have a higher failure rate given they are growth companies still in the early stages of development. Such portfolio companies have relatively short operating histories and are in need of a significant amount of capital to grow their business as well as to gauge market acceptance and traction. Moreover, they may lack the financial resources to meet their financial obligations, particularly during low economic cycles, as well as a proven business model to effectively compete with larger companies. Accordingly, as our investments at this stage of a company’s development are highly speculative and entail greater risks than in companies that are in more mature operating stages or have proven business models, a total loss of capital is a likely outcome.

Certain of our funds, including most funds under our East Value category, invest in the publicly listed equities of companies. As we are typically a smaller minority shareholder, we may not always have the ability to influence the management direction of a portfolio company. In addition, control dilution may cause us to lose ownership percentage in such portfolio company. Furthermore, many of these publicly-listed companies are small- and mid-cap companies that are in their early stages, which make them riskier investments as they are more vulnerable to market changes and may have lower trading liquidity than larger public companies. As a result, the share prices of these publicly-listed companies may fluctuate significantly and have a negative impact on our funds’ performance.

We also invest in securities that are not publicly traded. Compared with publicly listed companies, these portfolio companies may not have strong management teams, financial auditing practices or internal control measures in place, and may lack operating or financial transparency, making it more difficult for us to oversee their performance. If we are unable to promptly identify or respond to any material problems with such non-public investees, our fund performance would be adversely affected.

If we are unable to successfully design and implement our fund exit strategies, we may not realize the expected returns or we may suffer losses on our fund investments.

Our funds generate gains from the underlying investments in our private equity funds. Carried interest entitles us to a percentage of a fund’s gain, effectively serving as a performance-based incentive. To date, we have realized carried interest from East Value series and East Value II series under our East Value fund category as well as our Asset Quantitative Hedging Strategy I fund under our Quantitative Hedging Funds category. We realize carried interest when we exit our funds by disposing of our interest in our funds’ portfolio companies at a premium price. However, we cannot guarantee that we will be able to sell our equity stock in these investees in the secondary market at the desired price or in accordance with our plans. Any adverse changes in the performance of our portfolio companies, the value of their stock, or general market conditions could have a negative impact on our timetable and plans or otherwise result in an unsuccessful exit of the relevant funds.

 

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In addition, we invest in a number of private companies. Unlike publicly traded companies that are valued through market-driven stock prices, the valuation of private companies, and particularly of early-stage companies, is difficult to assess. Moreover, the ability of certain of our funds to dispose of investments is heavily dependent on, or significantly affected by, the public equity markets or the level of M&A activities in China. Whether we are able to realize any value from an investment may depend upon the ability to successfully complete an IPO of the portfolio company in which such investment is held, or the successful acquisition of our shares in the portfolio company by a third party. Accordingly, our funds may not be able to cash out or divest of their equity investments in these private companies until after a substantial length of time, if at all, exposing the investment returns to risks of downward movement in fair value. Our ability to exit our funds through the acquisition of our shares by third parties could be further complicated by delays in the negotiation process, closing process or other factors. In September 2017, an investee of one of our funds entered into a share purchase agreement with a PRC-listed company, pursuant to which such public company is to acquire our investee. The acquisition has not been completed, and may be delayed or may not materialize, which as a result may jeopardize our ability to realize returns on our investments.

The investments of our funds are subject to a number of inherent risks.

Our results are highly dependent on our continued ability to generate attractive returns from our investments. Investments made by our private equity funds involve a number of significant risks inherent to private equity investing, including the following:

 

   

significant failures of our portfolio companies to comply with laws and regulations applicable to them could affect the ability of our funds to invest in other companies in certain industries in the future and could harm our reputation;

 

   

companies in which private equity investments are made are more likely to depend on the management talents and efforts of a small group of persons and, as a result, the death, disability, resignation or termination of one or more of those persons could have a material adverse impact on their business and prospects and the investment made;

 

   

companies in which private equity investments are made may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; and

 

   

our funds generally establish the capital structure of portfolio companies on the basis of the financial projections based primarily on management judgments and assumptions, and general economic conditions and other factors may cause actual performance to fall short of these financial projections, which could cause a substantial decrease in the value of our equity holdings in the portfolio company and cause our funds’ performance to fall short of our expectations.

Our current business model of raising capital to fund targeted transactions on a deal-by-deal basis exposes us to certain risks.

As we are a relatively young private equity fund manager in China with a limited operating history, our current business model is to identify investment targets first and then raise capital to fund our targeted transactions on a deal-by-deal basis, as opposed to soliciting capital commitments from potential investors prior to seeking suitable investments. We believe that our current business model enables us to attract a large number of potential investors and raise capital quickly and efficiently as we are already able to present such potential investors with relatively detailed information on the pre-screened investment targets, thereby enhancing their confidence in the fund. However, our ability to raise capital from our investors is critical to us in ways that may be different from

 

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other private equity funds, as we are required to raise sufficient funds within a specific time frame in order to successfully secure the transaction and close the investment. Failure to do so would likely lead to lost investment opportunities, which could in turn harm our reputation in China’s private equity industry and impair our ability to raise capital to fund future investments. Moreover, unlike some private equity funds that are able to charge management fees and subscription fees on capital commitments, we are only able to charge management fees and subscription fees on private equity funds that we actually raise. If our business model ceases to be viable as we continue to expand our overall operations and we are unable to change our business model in a timely manner or at all, our business, financial condition, results of operations and prospects could be materially and adversely affected.

We depend significantly on our ability to raise capital from third-party investors. If we are unable to raise capital from our investors, we would be unable to collect management fees or deploy their capital into investments and potentially collect management fees or carried interest, which would materially reduce our revenue and cash flow and adversely affect our financial condition.

We depend significantly on our ability to raise capital from third-party investors. For example, our business model of identifying investment targets first and then raising capital for our funds on a deal-by-deal basis requires us to complete the fundraising phase within a specific time frame in order to secure the targeted transaction and close the investment. See “—Our current business model of raising capital to fund targeted transactions on a deal-by-deal basis exposes us to certain risks.” Additionally, because we raise capital from third-party investors in China to invest in U.S. listed China-based companies, changes in China’s foreign currency exchange regime, including the QDII program, and any new regulations restricting our ability to raise capital from institutions and individuals, as well as any new regulations restricting foreign investments, will adversely affect our ability to raise capital from investors. See “—Risks Related to Doing Business in China—Government control of currency conversion may limit our ability to use our revenues effectively and the ability of our PRC subsidiary to obtain financing.”

Moreover, certain factors, such as the performance of the stock market, the pace of distributions from our funds and from the funds of other asset managers or the asset allocation rules or regulations or investment policies to which such investors are subject, could inhibit or restrict the ability of investors to make investments in our investment funds. Moreover, as we grow our business and fund portfolio, we may need to identify and attract new investors in order to continue to secure deals and increase our deal flow. We can give no assurance that we will be able to grow our investor base. Our ability to raise new funds could be hampered if the general appeal of our private equity investments were to decline. Private equity investments could fall into disfavor as a result of concerns about liquidity and short-term performance. In addition, in connection with raising new funds or making further investments in existing funds, we negotiate terms for such funds and investments with existing and potential investors. The outcome of such negotiations could result in our agreement to terms that are materially less favorable to us than funds managed by our competitors. Such terms could restrict our ability to raise investment funds with investment objectives or strategies that compete with existing funds in the market, add additional expenses and obligations for us in managing the fund or increase our potential liabilities, all of which could ultimately reduce our revenue.

The failure of our investment funds to raise capital in sufficient amounts could result in a decrease in our AUM as well as our revenue, or could result in a decline in the rate of growth of our AUM and revenue, any of which could have a material adverse impact on our financial condition. Our past experience with growth of AUM provides no assurance with respect to the future.

Furthermore, some of our fund investors may have concerns about the prospect of our becoming a publicly traded company, including concerns that as a public company we will shift our focus from the interests of our fund investors to those of our shareholders. Some of our fund investors may believe that we will strive for near-term profit instead of superior risk-adjusted returns for our fund investors over time or grow our AUM for the

 

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purpose of generating additional management fees without regard to whether we believe there are sufficient investment opportunities to effectively deploy the additional capital. There can be no assurance that we will be successful in our efforts to address such concerns or to convince fund investors that our decision to pursue this offering will not affect our longstanding priorities or the way we conduct our business. Failure to allay such concerns may impact our ability to continue raising capital from our fund investors. A decision by a significant number of them not to invest in our funds or to cease doing business with us altogether could inhibit our ability to achieve our investment objectives and could have a material adverse effect on our business and financial condition.

We rely heavily on our relationships with financial institutions, corporate partners, financial advisors and other financial intermediaries in China.

We generally source and identify potential investment targets through our extensive network of financial institutions, corporate partners, third-party financial advisors and other financial intermediaries in China. These parties have contributed to our deal flow by providing us with leads in identifying potential quality investment targets and generating investment opportunities for us. We also conduct joint fundraising with several major PRC financial institutions, which provide us with access to additional private investors. As such, our business is heavily dependent on our relationships with these third parties. Although we have maintained stable relationships with them a material deterioration or termination of our relationships with any major financial institution, corporate partner, third-party financial advisor or financial intermediary, or the failure to further expand our network, could inhibit our ability to secure deal flow or raise funds, which in turn would have a material adverse effect on our business, financial condition and growth prospects.

If we fail to invest our funds in the QDII plans, or the QDIIs disagree with our investment proposals with respect to the QDII plans, we may be unable to invest in our desired target companies.

East Value category is our largest fund category. A majority of our existing funds in this category are invested in the U.S. capital markets, and we may in future expand and diversify our fund portfolio to include investments in other foreign markets. Due to the increasingly stringent measures implemented by SAFE under China’s foreign exchange regulatory regime, there are limited options for China-based investors and fund managers, including us, to access the foreign markets. One of the few channels enabling capital outflow is the QDII program, under which certain qualified domestic entities that are licensed by their respective competent regulators and granted a foreign exchange quota by SAFE can directly invest in foreign securities. To comply with PRC laws, we have structured our overseas investments by investing proceeds from our funds in the investment plans established by approved QDIIs in China, or QDII plans, which then invest in the target investments. Each of our QDII plans is unique and specifically designated to us. Under each QDII plan, we negotiate with the relevant QDII to obtain an investment amount that meets our specific needs for the investment proposal under such QDII plan. See “Our Business—Structure and Operation of Our Investment Funds — Onshore/offshore Structure and QDII.” Although we believe we have significant influence over the QDII plans, the QDIIs could theoretically disagree with our investment proposals and decide not to invest in our target. To date, all of the investment decisions made by the QDIIs with respect to the QDII plans in which we have invested have been consistent with our investment proposals to them and we have not encountered any material difficulties in reaching an agreement with any QDII regarding the investment amount needed under each QDII plan. However, we cannot guarantee that the QDIIs we collaborate with will agree with our investment proposals or will agree to the needed investment amount requested by us in the future. If a QDII disagrees with our investment proposal or if we fail to secure a sufficient investment amount under any QDII plan to meet our needs for the investment proposal, we may lose the opportunity to invest in our desired targets or to make our overseas investments as planned. In addition, if the QDIIs we currently or intend to collaborate with are no longer allocated foreign exchange quota, or if our relationships with any of them were to deteriorate or terminate, our business, financial condition and prospects would be materially and adversely affected. Although SAFE further increased the total QDII quota available for QDII plans under the QDII program in April 2018, we cannot assure you that the PRC government

 

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will not implement new regulations in the future to restrict the foreign currency exchange quota of any QDII we currently collaborate with, or cease to allocate foreign exchange quota, or otherwise change the QDII program such that our ability to access the foreign capital markets would be impaired.

Valuation methodologies for certain assets in our funds can involve subjective judgments, and the fair value of assets established pursuant to such methodologies may be incorrect, which could result in the misstatement of fund performance and accrued carried interest.

Currently, we focus our private equity investments primarily on U.S. China concepts stocks, particularly on companies in the TMT sector such as new economy companies, many of which are early-stage and small- and mid- cap. Although many of these are publicly traded companies, their share prices may fluctuate significantly, which also contribute to the uncertainties in valuation. As a result, valuation methodologies may involve substantial subject judgments. In addition, for our investments in privately-held companies, there are often no readily ascertainable market prices.

Fair values of our investments are determined by reference to projected net earnings, earnings before interest, taxes, depreciation and amortization (“EBITDA”), the discounted cash flow method, comparable values in public market or private transactions, valuations for comparable companies and other measures which, in many cases, are unaudited at the time received. The determination of fair value using these methodologies takes into consideration a range of factors including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance and financing transactions subsequent to the acquisition of the investment. These valuation methodologies involve a significant degree of management judgement.

Because there is significant uncertainty in the valuation of, or in the stability of the value of, illiquid investments, the fair values of such investments as reflected in an investment fund’s net asset value do not necessarily reflect the prices that would be obtained by us on behalf of the investment fund when such investments are realized. Realizations at values significantly lower than the values at which investments have been reflected in prior fund net asset values would result in reduced earnings or losses for the applicable fund, the loss of potential carried interest and management fees. Changes in values attributed to investments may result in volatility in the net asset values and results of operations that we report. Moreover, a situation where asset values turn out to be materially different than values reflected in prior fund net asset values could cause investors to lose confidence in us, which could in turn result in difficulty in raising additional funds.

Our investment approach may fail.

Our investment approach includes investing in all stages of an investment cycle, gaining early entry as a financial advisor where the opportunity to do so arises, and purchasing sizeable minority blocks of securities in the IPO of our target companies as a cornerstone investor. In addition, we currently focus our investments primarily on U.S. China concepts stock, particularly on companies in the TMT sector such as new economy companies. The success of our investment approach depends, in part, upon our ability to correctly interpret market data and other information. It also depends on our ability to conduct or obtain useful investment research and analysis and/or predict market conditions and developments. Failure to do so could have a material adverse effect on the performance of the funds. Some of our strategies may be new or may be rapidly developing. This could increase the difficulties that we face in successfully pursuing such strategies on behalf of our funds. As the approach and strategies that we currently employ may be modified and altered from time to time, it is possible that strategies used in the future may be different from those currently in use. No assurance can be given that our current and/or future strategies will be successful under all or any market conditions.

The due diligence process that we undertake in connection with investments by our investment funds may not reveal all facts that may be relevant in connection with an investment.

Before making investments, we conduct due diligence that we deem reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, we may be required to

 

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evaluate important and complex business, financial, tax, accounting and legal issues. In addition to conducting assessments regarding an investment in accordance with our internal risk management policies, we may involve outside consultants, legal advisors and accountants in the due diligence process in varying degrees depending on the type of investment. Nevertheless, when conducting due diligence and making an assessment regarding an investment, we rely on the resources available to us, including information provided by the target of the investment. Accordingly, we cannot be certain that the due diligence investigation that we carry out with respect to any investment opportunity will reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity. Instances of fraud, accounting irregularities and other deceptive practices can be difficult to detect. In particular, if any of our publicly listed target companies were found to have engaged in such practices, their securities could be halted from trading or they could be delisted from the relevant securities exchange, which would result in diminished market value and investor confidence and, in turn, lead to a significant or total loss on our investment.

We cannot be certain that our due diligence investigations will result in investments being successful or that the actual financial performance of an investment will not fall short of the financial projections we used when evaluating that investment. Failure to identify risks associated with our investments could have a material adverse effect on our business.

Our investment funds make investments in companies that we do not control.

We generally make minority investments, which are equities of companies that we do not control. Such investments may be subject to the risk that the company in which the investment is made may make business, financial or management decisions with which we do not agree or that the majority stakeholders or the management of the company may take risks or otherwise act in a manner that does not serve our interests. If any of the foregoing were to occur, the value of investments by our funds could decrease and our financial condition, results of operations and cash flow could suffer as a result.

If any of our U.S.-listed portfolio companies were to become the subject of intense scrutiny by investors, financial commentators and regulatory agencies, the stock price and reputation of such portfolio companies could suffer, which could result in a complete loss of our investment in them.

Historically, a number of U.S.-listed companies whose operations are based in China were the subject of intense scrutiny by investors, financial commentators and regulatory agencies. Much of the scrutiny centered on financial and accounting irregularities and mistakes, a lack of effective internal controls over financial reporting and, in many cases, allegations of fraud. As a result of the scrutiny, the publicly traded stock of these U.S. listed China-based companies subject to such scrutiny has sharply decreased in value. Many of these companies were subject to shareholder lawsuits and/or SEC enforcement actions that conducted internal and/or external investigations into the allegations. If any of our U.S.-listed portfolio companies were to become the subject of any such scrutiny, whether or not any allegations are true, their stock price and reputation could be impaired and we could experience a decline or total loss in the value of our investments in these portfolio companies, which could in turn harm our reputation and materially and adversely affect our financial condition and results of operations.

We expect that competition in our industry will intensify.

Our target customers are private investors in China, many of which are high income individuals. With the continued rise in China’s private wealth, the country’s private wealth management services industry, while currently fragmented and still at a relatively early stage of development compared to more developed markets, is projected to grow significantly according to the CIC Report. As such, we expect that competition in our industry and, in particular, for capital from private investors in China such as our target customers, will intensify. If and when that occurs, we expect our competitors to include private equity funds, venture capital firms, hedge funds, funds of hedge funds and alternative asset managers, as well as other financial institutions. Competition in our business is based on a variety of factors, including investment performance, the quality of service provided to

 

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clients, investor liquidity and willingness to invest, fund terms (including fees), brand recognition and business reputation.

We believe that the following are some of the factors that serve to increase our competitive risks:

 

   

a number of our competitors may have greater financial, technical, marketing and other resources and more personnel than we do;

 

   

some of our competitors may have a stronger network of private investors or a larger investor base than we do;

 

   

some of our funds may not perform as well as competitors’ funds or other available investment products;

 

   

several of our competitors have significant amounts of capital, and many of them have similar investment objectives to ours, which may create additional competition for investment opportunities and may reduce the size and duration of pricing inefficiencies that many alternative investment strategies seek to exploit;

 

   

some of our competitors may also have a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to investment opportunities;

 

   

some of our competitors may have stronger ties within certain industries or communities from which they identify investment opportunities;

 

   

some of our competitors may be subject to less regulation and accordingly may have more flexibility to undertake and execute certain businesses or investments than we can and/or bear less compliance expense than we do;

 

   

some of our competitors may have higher risk tolerances, different risk assessments or lower return thresholds, which could allow them to consider a wider variety of investments and to bid more aggressively than us for investments that we want to make;

 

   

there are relatively few barriers to entry impeding new alternative asset fund management firms, and the successful efforts of new entrants into our various businesses, including former “star” portfolio managers at large diversified financial institutions as well as such institutions themselves, is expected to continue to result in increased competition;

 

   

some of our competitors may have better expertise or be regarded by investors as having better expertise in a specific asset class or industry than we do;

 

   

some investors may prefer to invest with an investment manager that is not publicly traded or is smaller with only one or two investment products that it manages; and

 

   

other industry participants will from time to time seek to recruit our investment professionals and other employees away from us.

We may lose investment opportunities in the future if we are unable to effectively compete in terms of pricing, structure and terms of our of our investment funds. Alternatively, we may experience decreased rates of return and increased risks of loss if we match the investment prices, structures and terms offered by our competitors. While we compete primarily on our track record for successful performance of our funds rather than on the level

 

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of our fees relative to those of our competitors, we face the risk that fees in the private equity fund management industry will decline in the future, without regard to the historical performance of a manager. Any reduction in fees on our existing or future funds without corresponding decreases in our cost structure would have a negative impact on our revenues and profitability.

We depend on our founding members and other key personnel, and the loss of their services or investor confidence in such personnel could have a material adverse effect on our business, results of operations and financial condition.

Our team of investment professionals is led by our founders, Mr. Xu He, our chief executive officer, and Mr. Xiaoyang Zhuang, our chief financial officer, both of whom have solid backgrounds in the financial advisory business which has provided them with an acute ability to source investment targets, evaluate investment opportunities and execute strategies. Their depth of experience as financial advisors has also exposed them to a wide network of contacts at major PRC securities firms and other financial intermediaries, which continues to facilitate the capital raising process for our funds. Accordingly, our success will depend on the continued service of these individuals. Our founders currently have no immediate plans to cease providing services to our firm, but our founders and other key personnel are not obligated to remain employed with us. In addition, our other key personnel may leave us in the future, and we cannot predict the impact that the departure of any key personnel will have on our ability to achieve our investment objectives. The loss of the services of any of them could have a material adverse effect on our revenues, net income and cash flow and could harm our ability to maintain or grow AUM in existing funds or raise additional funds in the future. We have historically relied in part on the interests of these professionals in the investment funds’ carried interest to discourage them from leaving the firm. However, to the extent our investment funds perform poorly, thereby reducing the potential for carried interest, their interests in carried interest become less valuable to them and may become a less effective retention tool.

Our senior professionals and other key personnel possess substantial experience and expertise and have strong business relationships with investors in our funds and other members of the business community. As a result, the loss of these personnel could jeopardize our relationships with investors in our funds and members of the business community and result in the reduction of AUM or fewer investment opportunities. For example, if any of our senior professionals were to join or form a competing firm, such move could have a material adverse effect on our business, results of operations and financial condition.

Recruiting and retaining professionals may be more difficult in the future, which could adversely affect our business, results of operations and financial condition.

Our most important asset is our people, and our continued success is highly dependent upon the efforts of our senior and other professionals. Our future success and growth depends to a substantial degree on our ability to retain and motivate our senior professionals and other key personnel and to strategically recruit, retain and motivate new talented personnel, including new senior professionals. However, we may not be successful in our efforts to recruit, retain and motivate the required personnel as the market for qualified investment professionals is extremely competitive. As such, our inability to attract and retain key personnel would adversely affect, in the short term, our continuity of operations and, in the long term, our profitability.

In order to recruit and retain existing and future senior professionals and other key personnel, we may need to increase the level of compensation that we pay to them. Accordingly, as we promote or hire new senior professionals and other key personnel over time or attempt to retain the services of certain of our key personnel, we may increase the level of compensation we pay to these individuals, which could cause our total employee compensation and benefits expense as a percentage of our total revenue to increase and adversely affect our profitability.

 

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We generally provide one-time financial advisory services over a short period and, as such, our financial advisory fees are not long-term contracted sources of revenue and are not predictable.

We generate a portion of our revenue from financial advisory fees and we expect our financial advisory business to continue to be a revenue source. Moreover, we are typically engaged to provide financial advisory as a one-time service over an average period of six months and, as such, our financial advisory fees are not long-term contracted sources of revenue. As each revenue-generating engagement typically is separately solicited, awarded and negotiated, any significant decline in our financial advisory engagements or the market for advisory services could adversely affect our business. In addition, many businesses do not routinely engage in transactions requiring our services. As a consequence, our fee-paying engagements with many clients are not predictable and high levels of financial advisory revenue in one period are not necessarily predictive of continued high levels of financial advisory revenue in future periods. In addition to the fact that most of our financial advisory engagements are single, non-recurring engagements, we may lose clients each year as a result of a client’s decision to retain other investment advisors, the sale, merger or restructuring of a client, a change in a client’s senior management and various other causes. As a result, our financial advisory revenue could decline materially due to such changes in the volume, nature and scope of our engagements.

Your investment should take into account our adoption of new accounting standards beginning fiscal year 2019, as a result of which our period-to-period operating results may not be directly comparable.

Beginning in fiscal year 2019, we expect to adopt the accounting standards updates under the “Revenue from Contracts with Customers”, the core principle of which requires companies to recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects what the companies expect to receive. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Accounting Developments.” The adoption of the new accounting standards is expected to affect, among others, the recognition of unrealized carried interest income from our fund management services, which represented a significant portion of our net revenue. The new accounting standards would effectively cause delays in recognition of unrealized carried interest as compared to our current accounting treatment. In particular, the amounts of unrealized carried interest that historically have been recognized at the end of each reporting period would be, under the new accounting standards, expected to be recognized at the termination of the funds. As a result, our carried interest may consist of realized carried interest only. In addition, the recognition of carried interest related compensation under our operation cost and expenses is also expected to be affected by the new accounting standards as such compensation is recognized in conjunction with, and calculated as a portion of, the carried interest revenue (historically including unrealized carried interest). Therefore, our adoption of the new accounting standards is expected to have a significant impact on our future operating results. Our historical consolidated financial statements prepared under the current accounting standards may not be directly comparable to our future consolidated financial statements adopting the new accounting standards. Your investment decision should take into account of the foregoing.

We may be affected by adverse changes in taxation law, tax treaties and in the practice of tax authorities.

Changes in taxation legislation, tax treaties and in the practice of tax authorities can affect investment behavior which can have the effect of making specific kinds of investment products either more or less attractive to existing or potential clients.

We cannot predict the impact of future changes to tax legislation, tax treaties and the practice of tax authorities on our business or on the attractiveness of our investment products. Amendments to existing tax legislation (in particular if there is a withdrawal of any available tax relief or an increase in tax rates) and tax treaties or the introduction of new rules and new tax treaties or changes in the practice of tax authorities may affect the investment decisions of either existing or potential clients. Changes from time to time in the interpretation of existing tax laws, amendments to existing tax rates, the introduction of new tax legislation and tax treaties, a

 

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change in the interpretation of tax legislation, any change in the practice of enforcement of such legislation or any particular change in our tax treatment or our funds could have a material adverse effect on our business, growth prospects, net inflows of AUM, fee income, results of operations and/or financial condition.

Operational risks may disrupt our businesses, result in losses or limit our growth.

We rely heavily on our financial, accounting, information and other data processing systems. If any of these systems do not operate properly or are disabled, whether as a result of tampering or a breach of our network security systems or otherwise, we could suffer financial losses, a disruption of our businesses, liability to our funds, regulatory intervention or reputational damage. In addition, we operate in businesses that are highly dependent on information systems and technology. Our information systems and technology may not continue to be able to accommodate our growth, and the cost of maintaining such systems may increase from its current level. Such a failure to accommodate growth, or an increase in costs related to such information systems, could have a material adverse effect on us.

Furthermore, we depend on our headquarters in Guangzhou, PRC, where most of our administrative and operations personnel are located, for the continued operation of our business. A disaster or a disruption in the infrastructure that supports our businesses, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could have a material adverse impact on our ability to continue to operate our business without interruption. Our disaster recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.

Sustaining our growth will also require us to commit additional management, operational and financial resources to identify new professionals to join our firm and to maintain appropriate operational and financial systems to adequately support expansion. Due to the fact that the market for hiring talented professionals is competitive, we may not be able to grow at the pace we desire.

Our risk management system and internal controls may not fully protect us against our risk exposures.

We have established an internal risk management system to manage our risk exposures, including our operational risks, compliance risks, legal risks and liquidity risks. Our risk management policies and procedures are based upon our experience in the industry, and may not be adequate or effective in managing our future risk exposures or protecting us against unidentified or unanticipated risks, which could be significant greater than those indicated by our past experiences. We continue to update our internal policies and procedures; however, they may fail to predict future risks due to changes in the market and regulatory conditions.

Effective implementation of our risk management and internal controls also depends on our employees. While we have measures in place to ensure our risk management policies and procedures are adhered to by our employees, we cannot assure you that this implementation will not involve human errors or mistakes or that our internal controls will effectively prevent or detect any non-compliance with our policies and procedures. Any significant departure from our policies and practices could undermine the effectiveness and performance of our risk management and internal controls, thereby increasing the potential for financial losses and non-compliance with regulations.

Employee misconduct could harm us by impairing our ability to attract and retain investors in our funds and subjecting us to significant legal liability and reputational harm. Fraud and other deceptive practices or other misconduct at our portfolio companies could harm performance.

There is a risk that our employees could engage in misconduct that adversely affects our business. Our ability to attract and retain investors and to pursue investment opportunities for our funds depends heavily upon the reputation of our professionals, especially our senior professionals. We are subject to a number of obligations and

 

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standards arising from our fund management business and our authority over the assets managed. The violation of these obligations and standards by any of our employees would adversely affect our clients and us. Our business often requires that we deal with confidential matters of great significance to companies in which our funds may invest. If our employees were to use or disclose confidential information improperly, we could suffer serious harm to our reputation, financial position and current and future business relationships, as well as face potentially significant litigation. It is not always possible to detect or deter employee misconduct, and the extensive precautions we take to detect and prevent this activity may not be effective in all cases. If any of our employees were to engage in misconduct or were to be accused of such misconduct, whether or not substantiated, our business and our reputation could be adversely affected and a loss of investor confidence could result, which would adversely impact our ability to raise future funds.

We will also be adversely affected if there is misconduct by senior management of portfolio companies in which our funds invest. Such misconduct might undermine our due diligence efforts with respect to such companies and it might negatively affect the valuation of a fund’s investments.

If we fail to implement and maintain effective internal control over financial reporting, our ability to accurately report our financial results may be impaired, which could adversely impact investor confidence and the market price of our ordinary shares.

Prior to this offering, we were a private company with limited accounting personnel and other resources for addressing our internal control over financial reporting. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the audit of our consolidated financial statements as of and for the fiscal years ended March 31, 2018 and 2017 and the review of our consolidated financial statement as of and for the three months ended June 30, 2018, we and our independent registered public accounting firm identified one material weakness and certain other control deficiencies in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States as of June 30, 2018. The material weakness identified was the lack of dedicated resources to take responsibility for the finance and accounting functions and the preparation of financial statements in compliance with U.S. GAAP.

We have taken steps and will continue to implement measures to remediate the material weakness identified. For details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Internal Control Over Financial Reporting.” However, we cannot assure you that we will be able to continue implementing these measures in the future, or that we will not identify additional material weaknesses or significant deficiencies in the future.

Furthermore, it is possible that, had our independent registered public accounting firm conducted an audit of our internal control over financial reporting, such firm might have identified additional material weaknesses and deficiencies. Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending March 31, 2019. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm may be required to report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management,

 

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operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ordinary shares.

Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

If we are unable to protect our proprietary information of investors, financial institutions and corporate partners, our ability to conduct our business may be adversely affected.

Our investor base and network within the industry is crucial to our business. We have collected, stored and processed certain personal, commercially sensitive or confidential data from such parties. We primarily rely on trade secret laws and contractual restrictions, including through confidentiality and/or non-compete provisions in agreements with our key employees, financial institutions and corporate partners to establish, maintain and protect our proprietary information and other trade secrets. Policing any misappropriation or unauthorized use of our proprietary information and other trade secrets is difficult and costly and the steps we have taken may be inadequate. For example, contractual agreements may be breached, and we may not succeed in enforcing our rights or have adequate remedies for any breach of laws or contractual agreements. In addition, we may not be able to enter into agreements or arrangements with everyone who has access to our proprietary information or trade secrets.

Moreover, our servers or databases may be a target and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic break-ins, or similar disruptions. While we have taken steps to protect the confidential and other proprietary information that we have access to, our security measures could be breached. Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. An accidental or willful security breach of or other unauthorized access to our servers or databases could cause confidential information of our investors or financial institutions or corporate partners to be stolen and used for criminal purposes. Any breach in security measures resulting in the unauthorized release of confidential information regarding the investors, financial institution partners and corporate partners would damage our relationships with them and subject us to significant liabilities related to the loss of information as well as time-consuming and expensive litigation and negative publicity, which would in turn harm our business, financial condition, reputation and prospects.

We may be subject to judicial, administrative or arbitration proceedings and may face significant liabilities and damage to our professional reputation as a result of litigation, regulatory proceedings or negative publicity.

The investment decisions we make in our fund management business may subject us to the risk of third-party litigation arising from investor dissatisfaction with the performance of those investment funds and a variety of other litigation claims and regulatory inquiries and actions.

 

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For example, in the event that we do not comply with the registration and reporting requirements for the funds we manage, or we raise capital from individuals who are not qualified investors as defined by the relevant laws and regulations, we may be suspended for the registration of new funds, our membership in the AMAC may be revoked, and we may be subject to fines and confiscation of illegal gains by the CSRC with respect material violations. Our directors and officers may also face disqualification of their certificates of private equity fund professional, and be subject to fines.

On the other hand, the current fund agreements specify the investment scope of the funds we raised from investors. In the event we make investments beyond the investment scope as agreed, while the relevant laws and regulations do not specify the subsequent liabilities for such conduct, we may face litigation initiated by our investors for breach of contract. In addition, to the extent that investors in our investment funds suffer losses resulting from fraud, gross negligence, willful misconduct or other similar misconduct, investors may have remedies against us under the PRC laws and regulations.

We are not currently subject to any pending judicial, administrative or arbitration proceedings that we expect would have a material impact on our financial conditions or results of operations. If any lawsuits were brought against us and resulted in a finding of substantial legal liability, such lawsuit could materially adversely affect our business, results of operations or financial condition or cause significant reputational harm to us, which could materially impact our business. We depend to a large extent on our business relationships and our reputation for integrity and high-caliber professional services to attract and retain investors and to pursue investment opportunities for our funds. As a result, allegations of improper conduct by private litigants or regulators, whether the ultimate outcome is favorable or unfavorable to us, as well as negative publicity and press speculation about us, our investment activities or the private equity industry in general, whether or not valid, may harm our reputation, which may be more damaging to our business than to other types of businesses.

Our senior management lacks experience in managing a public company and complying with laws applicable to operating as a U.S. public company domiciled in the British Virgin Islands and failure to comply with such obligations could have a material adverse effect on our business.

Prior to the completion of this offering, CSC Guangzhou has operated as a private company located in China. In connection with this offering, we formed our company, Cornerstone Management, Inc. in the British Virgin Islands and CSC Management Ltd. in Hong Kong, while WFOE and CSC Guangzhou, our variable interest entity as well as its subsidiary, were formed in China. In the process of taking these steps to prepare our company for this initial public offering, senior management of CSC Guangzhou became the senior management of our company. None of senior management of our company has experience managing a public company or managing a British Virgin Islands company.

As a result of this offering, our company will become subject to laws, regulations and obligations that do not currently apply to it, and our senior management currently has no experience in complying with such laws, regulations and obligations. For example, Cornerstone Management, Inc. will need to comply with the British Virgin Islands laws applicable to companies that are domiciled in that country. The senior management is only experienced in operating the business of CSC Guangzhou and its subsidiary in compliance with PRC laws. Similarly, by virtue of this offering, our company will be required to file annual and current reports in compliance with U.S. securities and other laws. These obligations can be burdensome and complicated, and failure to comply with such obligations could have a material adverse effect on our company. In addition, we expect that the process of learning about such new obligations as a public company in the United States will require our senior management to devote time and resources to such efforts that might otherwise be spent on the management of corporate private equity funds.

 

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Risks Relating to Our Corporate Structure

The PRC government regulates the private equity industry through strict business licensing requirements and other government regulations. These laws and regulations also include limitations on foreign ownership of PRC companies that engage in private equity businesses.

As a British Virgin Island company, we are classified as a foreign enterprise under PRC laws and regulations, and our wholly-owned PRC subsidiary Guangzhou Cornerstone Corporate Consulting Co., Ltd., or WFOE, is a foreign-invested enterprise, or a FIE. To comply with PRC laws and regulations, we conduct our private equity businesses in China through contractual arrangements with our VIE and its shareholders. These contractual arrangements provide us with effective control over our VIE and enable us to receive substantially all of the economic benefits of our VIE in consideration for the services provided by our wholly-owned PRC subsidiary, and have an exclusive option to purchase all of the equity interest in our VIE when permissible under PRC laws.

As advised by our PRC Legal Advisors, the corporate structure of our VIE in China is in compliance with all existing PRC laws and regulations. However, as there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, we cannot assure you that the PRC government would agree that our corporate structure or any of the above contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.

If we or any of our current or future VIE are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion in dealing with such violations, including levying fines, confiscating our income or the income of our WFOE and CSC Guangzhou and its subsidiary, revoking their business licenses or operating licenses, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting our rights to use the proceeds from this offering to finance our business and operations in China, or taking other 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 and results of operations.

Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

The Ministry of Commerce of the People’s Republic of China (“MOFCOM”) published a discussion draft of the proposed Foreign Investment law (“Draft Foreign Investment Law”) in January 2015 aiming to, upon enactment, replace the existing laws regulating foreign investment in China, namely, the Sino-Foreign Equity Joint Venture Enterprise Law, the Sino-Foreign Cooperative Joint Venture Enterprise Law, and the Wholly Foreign-Invested Enterprise Law, together with their implementation rules and ancillary regulations. On April 17, 2018, the Standing Committee of the National People’s Congress published its legislation work plan for 2018, according to which the Draft Foreign Investment Law will be deliberated by the Standing Committee of the National People’s Congress in December 2018. However, there are still substantial uncertainties with respect to the enactment timetable, interpretation and implementation of the Draft Foreign Investment Law. The Draft Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance, and business operation.

Among other things, the Draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise (“FIE”). Once an entity is determined to be an FIE, it will be subject to the foreign investment restrictions or prohibitions set forth in a “negative list”, which is classified into the “catalog of prohibitions” and

 

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“catalog of restrictions”, to be separately issued by the State Council later. Foreign investors are not allowed to invest in any sector set forth in the catalog of prohibitions. If the FIE is engaged in the industry listed in the catalog of restrictions, they need market entry clearance by the MOFCOM. Otherwise, prior approval from governmental authorities as mandated by the existing foreign investment legal regime would no longer be required for establishment of the FIE.

The variable interest entity (“VIE”) structure has been adopted by many PRC-based companies, including us, to obtain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions in China. Under the Draft Foreign Investment Law, VIEs that are controlled via contractual arrangement would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors. Therefore, for any companies with a VIE structure in an industry category that is on the catalog of restrictions, the VIE structure may be deem a domestic investment only if the ultimate controlling person(s) is/are of foreign nationalities, then the VIEs will be treated as FIEs and any operations on the catalog of restrictions without market entry clearance may be considered as illegal.

In addition, on August 30, 2017, the State Council circulated the draft Interim Measures on Administration of Privately-Raised Investment Funds (the “New Interim Measures for PE Funds”) for comments, pursuant to which overseas institutions cannot directly raise capital from domestic investors to set up private equity fund unless otherwise specified by law. The New Interim Measures for PE Funds further specifies that the regulations regarding the administration of foreign-invested private equity fund managers will be promulgated by CSRC later. If our VIE is deemed as a FIE, we face uncertainties as to whether market clearance is required, and, if required, whether we can timely obtained such clearance, or at all. If we are not able to obtain such clearance when required, our VIE structure may be regarded as invalid or illegal. As a result, we would not be able to (i) continue our business in China through our contractual arrangements with the shareholders of CSC Guangzhou, (ii) exert control over CSC Guangzhou and its subsidiary, and (iii) receive the economic benefits of CSC Guangzhou and its subsidiary under such contractual arrangements, consolidate the financial results of CSC Guangzhou and its subsidiary. Were this to occur, our results of operations and financial condition would be materially and adversely affected.

Our contractual arrangements with our VIE may not be as effective in providing operational control as direct ownership.

We have relied and expect to continue to rely on contractual arrangements with CSC Guangzhou and its shareholders to operate our private equity businesses. These contractual arrangements may not be as effective in providing us with control over the VIE as direct ownership. If we had direct ownership of our VIE, we would be able to exercise our rights as a shareholder to effect changes in the Board of Directors, which in turn could effect changes, subject to any applicable fiduciary obligations, at the management level. However, under the current contractual arrangements, we rely on the performance of the contractual obligations by our VIE and its shareholders to exercise control over our VIE. Although we have been advised by our PRC Legal Advisors, each contract under WFOE’s contractual arrangement with CSC Guangzhou is valid, binding and enforceable under current PRC laws and regulations, these contractual arrangements may not be as effective in providing us with control over CSC Guangzhou as direct ownership of CSC Guangzhou would be.

The shareholders of our VIE may breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIE. Any failure by our VIE or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business and financial condition.

The shareholders of our VIE may breach, or cause our VIE to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIE. If our VIE or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend resources to enforce our rights under the contracts. We may have to rely on legal remedies under PRC law, including seeking

 

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specific performance or injunctive relief and claiming damages, which may not be effective. For example, if the shareholders of CSC Guangzhou were to refuse to transfer their equity interests in CSC Guangzhou to us or our designee when we exercise the call option pursuant to these contractual arrangements, if he transfer the equity interests to other persons against our interests, or if he were otherwise to act in bad faith toward us, then we may have to take legal actions to compel him to perform his contractual obligations.

All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would incur additional expenses and delay. In the event we are unable to enforce these contractual arrangements, we may not be able to exert effective control over our VIE, and our ability to conduct our private equity investment fund business may be negatively affected.

Contractual arrangements our subsidiary has entered into with our VIE may be subject to scrutiny by the PRC tax authorities and a finding that we or our VIE owe additional taxes could substantially reduce our consolidated net income and the value of your investment.

Under PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among WFOE, our VIE and the shareholders of our VIE do not represent arm’s-length prices and consequently adjust WFOE’s or our VIE’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction, for PRC tax purposes, of expense deductions recorded by our VIE, which could in turn increase their tax liabilities. In addition, the PRC tax authorities may impose late payment fees and other penalties on WFOE or our VIE for any unpaid taxes. Our consolidated net income may be materially and adversely affected if WFOE or our VIE’s tax liabilities increase or if they are subject to late payment fees or other penalties.

WFOE is required to bear the losses of CSC Guangzhou, thus our liquidity may be adversely affected, which could harm our financial condition and results of operations.

On October 12, 2017, our WFOE entered into an Exclusive Business Cooperation Agreement with CSC Guangzhou. Pursuant to the Exclusive Business Cooperation Agreement, WFOE agreed to bear the losses of CSC Guangzhou. Currently, the incomes and profits of WFOE are completely dependent on CSC Guangzhou. If CSC Guangzhou suffers losses, the losses will be carried over and deducted from the payment to WFOE in the following month(s). Thus, WFOE would be required to absorb any losses incurred by CSC Guangzhou and, moreover, would be required to continue to provide services to CSC Guangzhou pursuant to the Exclusive Business Cooperation Agreement without receiving any payment. There can be no guarantee that WFOE will be able to recoup any of the losses incurred by CSC Guangzhou. Further, under the Exclusive Business Cooperation Agreement, WFOE may absorb the losses at a time when WFOE does not have sufficient cash to provide services and at a time when WFOE or we may be unable to borrow such funds on terms that are acceptable, if at all. As a result, WFOE is deemed to bear any losses suffered by CSC Guangzhou under the Exclusive Business Cooperation Agreement, and any losses absorbed by WFOE may have an adverse effect on our liquidity, financial condition and results of operations.

We rely on dividends paid by WFOE for our cash needs.

We rely primarily on dividends paid by WFOE for our cash needs, including the funds necessary to pay dividends and other cash distributions, if any, to our shareholders, to service any debt we may incur and to pay

 

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our operating expenses. The payment of dividends by entities organized in the PRC is subject to limitations as described herein. Under British Virgin Islands law, we may only pay dividends from surplus (the excess, if any, at the time of the determination of the total assets of our company over the sum of our liabilities, as shown in our books of account, plus our capital), and we must be solvent before and after the dividend payment in the sense that we will be able to satisfy our liabilities as they become due in the ordinary course of business; and the realizable value of assets of our company will not be less than the sum of our total liabilities, other than deferred taxes as shown on our books of account, and our capital. If we determine to pay dividends on any of our ordinary shares in the future, as a holding company, we will be dependent on receipt of funds from WFOE.

Pursuant to the Implementation Rules for the new Chinese enterprise income tax law, effective on January 1, 2008, dividends payable by a foreign investment entity to its foreign investors are subject to a withholding tax of up to 10%. Pursuant to Article 10 of the Arrangement Between the Mainland of China and the Hong Kong Special Administration Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income effective December 8, 2006, dividends payable by a foreign investment entity to its Hong Kong investor who owns 25% or more of the equity of the foreign investment entity is subject to a withholding tax of up to 5%.

The payment of dividends by entities organized in the PRC is subject to limitations, procedures and formalities. Regulations in the PRC currently permit payment of dividends only out of accumulated profits as determined in accordance with accounting standards and regulations in China. WFOE is also required to set aside at least 10% of its after-tax profit based on PRC accounting standards each year to its compulsory reserves fund until the accumulative amount of such reserves reaches 50% of its registered capital.

The transfer to this reserve must be made before distribution of any dividend to shareholders. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

If we were deemed to be an investment company under the Investment Company Act of 1940, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business and the price of our ordinary shares.

An entity will generally be deemed an “investment company” under Section 3(a)(1) of the Investment Company Act of 1940, as amended (the “1940 Act”) if: (a) it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities, or (b) absent an applicable exemption, it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We believe that we are engaged primarily in the business of providing private equity fund management services and not in the business of investing, reinvesting or trading in securities. We hold ourselves out as an private equity fund management firm and do not propose to engage primarily in the business of investing, reinvesting or trading in securities. In that respect, we do not believe that we fall within the definition of an ‘‘investment company’’ under the 1940 Act because of the nature of our assets and the sources of our income. Similarly, we believe that Cornerstone Management, Inc. is not an investment company under Section 3(b)(1) of the Investment Company Act because it is primarily engaged in the private equity fund management business, which is a non-investment company business. If one or more of our operating entities ceased to be a wholly-owned subsidiary of ours, our interests in those subsidiaries could be deemed an ‘‘investment security’’ for purposes of the 1940 Act or otherwise cause us to be deemed an investment company.

The 1940 Act and the rules thereunder contain detailed parameters for the organization and operation of investment companies. Among other things, the 1940 Act and the rules thereunder limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities, generally prohibit the issuance of

 

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options and impose certain governance requirements. We intend to conduct our operations so that Cornerstone Management, Inc. will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact business with affiliates, could make it impractical for us to continue our business as currently conducted and would have a material adverse effect on our business, financial condition, results of operations and the price of our ordinary shares. In addition, we may be required to limit the amount of investments that we make as a principal or otherwise conduct our business in a manner that does not subject us to the registration and other requirements on the 1940 Act.

Risks Related to Doing Business in China

Our profitability may be seriously affected by fluctuations in exchange rates between the Renminbi and the U.S. dollar.

We have significant foreign currency exposure, and are primarily affected by fluctuations in exchange rates between the Renminbi and the U.S. dollar. While we typically raise capital denominated in Renminbi from China-based investors, the focus of our investments is in China-based companies that are publicly listed or seeking to list in the United States, or U.S. China concepts stock. Accordingly, we convert Renminbi into U.S. dollars through the QDII plans to purchase U.S.-listed securities, and back into Renminbi when we exit our investments and repatriate the proceeds to China. In addition, as we make a significant amount of our investments in U.S. dollars while our carried interest are generally settled with our investors in Renminbi, any material appreciation in the U.S. dollar would have a negative impact on our AUM when converting back into Renminbi, which would in turn adversely affect our carried interest. Furthermore, all of our revenue is denominated in Renminbi while our financial reporting is in U.S. dollars. As a result, any significant fluctuation in exchange rates may cause us to incur currency exchange losses and harm our financial condition and results of operations.

Movements in Renminbi exchange rates are affected by, among other things, changes in political and economic conditions and China’s foreign exchange regime and policy. The Renminbi has been unpegged from the U.S. dollar since July 2005 and, although the People’s Bank of China regularly intervenes in the foreign exchange market to limit fluctuations in Renminbi exchange rates, the Renminbi may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that the PRC authorities may lift restrictions on fluctuations in Renminbi exchange rates and lessen intervention in the foreign exchange market in the future.

To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all.

Governmental control of currency conversion may limit our ability to use our revenues effectively and the ability of our PRC subsidiary to obtain financing.

The PRC government imposes control on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive a majority of our revenues in Renminbi, which currently is not a freely convertible currency. Restrictions on currency conversion imposed by the PRC government may limit our ability to use revenues generated in Renminbi to fund our expenditures denominated in foreign currencies or our business activities outside China. Under China’s existing foreign exchange regulations, Renminbi may be freely converted into foreign currency for payments relating to current account transactions, which include among other things dividend payments and payments for the import of goods and services, by complying with certain procedural requirements. Our PRC subsidiary are able to pay dividends in foreign currencies to us without prior approval from SAFE, by complying with certain procedural requirements. Our PRC subsidiary may also retain foreign currency in their respective current account bank accounts for use in

 

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payment of international current account transactions. However, we cannot assure you that the PRC government will not take measures in the future to restrict access to foreign currencies for current account transactions.

Conversion of Renminbi into foreign currencies, and of foreign currencies into Renminbi, for payments relating to capital account transactions, which principally includes investments and loans, generally requires the approval of SAFE and other relevant PRC governmental authorities. Restrictions on the convertibility of the Renminbi for capital account transactions could affect the ability of our PRC subsidiary to make investments overseas or to obtain foreign currency through debt or equity financing, including by means of loans or capital contributions from us. We cannot assure you that the registration process will not delay or prevent our conversion of Renminbi for use outside of China. In 2007, China expanded its qualified domestic institutional investor, or QDII, program, one of the few legal means through which China-based investors can buy foreign-listed securities, to permit a broader class of financial intermediaries to invest overseas. The QDII program, first launched in 2006 and designed to restrict the outflow of capital from China, allows major financial institutions in China to raise capital in Renminbi before converting such capital into foreign currencies to enable investment in foreign stock exchanges. We cannot assure you that the PRC government will not implement new regulations to further restrict currency exchange quota. Any tightening of the quota under the QDII program could restrict our ability to raise capital and to access the U.S. capital markets. On the other hand, any measures taken by the PRC government to relax the QDII quota could increase competition for our investments, which may have an adverse effect on our business, financial condition and results of operations.

Adverse changes in political, economic and other policies of the Chinese government could have a material adverse effect on the overall economic growth of China, which could materially and adversely affect the growth of our business and our competitive position.

The majority of our business operations are conducted in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in China. Although the PRC economy has been transitioning from a planned economy to a more market-oriented economy since the late 1970s, the PRC government continues to exercise significant control over China’s economic growth through direct allocation of resources, monetary and tax policies, and a host of other government policies such as those that encourage or restrict investment in certain industries by foreign investors, control the exchange between the Renminbi and foreign currencies, and regulate the growth of the general or specific market. While the Chinese economy has experienced significant growth in the past 30 years, growth has been uneven, both geographically and among various sectors of the economy. Furthermore, the current global economic crisis is adversely affecting economies throughout the world. As the PRC economy has become increasingly linked with the global economy, China is affected in various respects by downturns and recessions of major economies around the world. The various economic and policy measures enacted by the PRC government to forestall economic downturns or bolster China’s economic growth could materially affect our business. Any adverse change in the economic conditions in China, in policies of the PRC government or in laws and regulations in China could have a material adverse effect on the overall economic growth of China and market demand for our outsourcing services. Such developments could adversely affect our businesses, lead to reduction in demand for our services and adversely affect our competitive position.

Failure to adapt to changes in laws and regulations governing the private equity industry on a timely basis may result in fines, create limitations or uncertainties with respect to our business activities, make it difficult for us to obtain or maintain the necessary approvals, permits or licenses or render our operations non-compliant, any of which could materially and adversely affect our business.

The China private equity marketplace is a new and evolving industry, and the laws and regulations governing the private equity industry are still developing. There are substantial uncertainties as to the legal system and the interpretation and implementation of the PRC laws and regulations applicable to the private equity industry. To date, the PRC government has only adopted an interim regulatory framework specifically governing private equity products, fund managers, and fund custodians. However, this framework has not been unified, and

 

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changes may occur at any time. For example, new laws and regulations may be adopted to require additional licenses and permits, and the relevant authorities may enhance their scrutiny over the private equity funds we distribute or manage, which may adversely affect our business. Currently, a license is required for the distribution of private equity products. We believe that such license is not required for our joint fundraising partners in locating and referring potential investors for us because, while our joint fundraising partners facilitate the sale of our private equity products and provide ancillary investor relationship maintenance services, they do not directly sell these products to and do not enter into the fund agreements with end investors. However, due to the lack of a clear and consistent regulatory framework for the sale of private equity products, we cannot assure you that the relevant PRC government will agree with our interpretation of the relevant rules. If the PRC government interprets the relevant rules differently and deems our joint fundraising partners’ services as sales of private equity funds, we may have to stop using such services which may affect our source of investors. Furthermore, any significant changes to the laws, regulations and government policies governing the private equity industry could impose substantial costs on us, create limitations or uncertainties regarding the way we raise capital for our private equity funds, conduct or expand our business, or affect our rights or obligations under our existing agreements with investors, target companies or other parties as well as the extent to which we can engage in, or charge fees for, our business. For example, on April 27, 2018, the People’s Bank of China, China Banking and Insurance Regulatory and Administration Committee, CSRC and SAFE jointly issued the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (“Guiding Opinions”). Among other things, the Guiding Opinions require all individual investors investing in asset management products, which includes private equity funds, to have a minimum of two years’ prior investment experience. See “Regulation—PRC Regulations of Private Equity Activities.” We do not believe that the Guiding Opinions will have any material impact on our business operations given that a majority of our existing individual investors already possess prior investment experience of more than two years when they invest in our funds based on our internal investor background due diligence checks and records. Going forward, we expect to seek only those investors with the requisite investment experience to ensure our compliance with the Guiding Opinions, and do not expect to encounter difficulties in doing so as an increasing number of private investors in China are high income investors possessing multiple years of investment experience based on CIC’s estimates. We expect that the CSRC and AMAC, which are the relevant authorities governing the private equity fund management industry, will amend their administrative rules to conform to the Guiding Opinions and will in the future issue more specific implementation guidance. We do not believe such amendments will have any material impact on our operations; however, as such amendments have not yet been released, we can give no assurance that any changes to these administrative rules, when implemented, will not subject us to other, more onerous requirements. See “Regulation—PRC Regulations of Private Equity Activities. Failure to adapt to these and other changes in applicable laws, regulations and other government policies on a timely basis may result in fines, restrictions on our business activities or revocations of approvals, permits or licenses, or render our operations to be non-compliant, any of which would have a material adverse effect on our business, financial condition and results of operations.

Uncertainties with respect to the PRC legal system could have a material adverse effect on us.

The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since the late 1970s, the PRC government has been building a comprehensive system of laws and regulations governing economic matters in general. The overall effect has been to significantly enhance the protections afforded to various forms of foreign investments in China. We conduct our business primarily through our WFOE, our VIE and its subsidiary established in China. These companies are generally subject to laws and regulations applicable to foreign investment in China. However, since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties, which may limit legal protections available to us. In addition, some regulatory requirements issued by certain PRC government authorities may not be consistently applied by other government authorities (including local government authorities), thus making strict compliance with all regulatory requirements impractical, or in some circumstances impossible. For example, we may have to resort to administrative and

 

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court proceedings to enforce the legal protection that we enjoy either by law or contract. However, since PRC administrative and court authorities have discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into with our business partners, clients and suppliers. In addition, such uncertainties, including any inability to enforce our contracts, together with any development or interpretation of PRC law that is adverse to us, could materially and adversely affect our business and operations. Furthermore, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other more developed countries. We cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the preemption of local regulations by national laws. These uncertainties could limit the legal protections available to us and other foreign investors, including you. In addition, any litigation in China may be protracted and result in substantial costs and diversion of our resources and management attention.

Since our operations and assets are located in China, shareholders may find it difficult to enforce a U.S. judgement against the assets of our Company, our directors and executive officers.

Our operation and assets are located in China. In addition, our executive officers and directors are non-residents of the U.S., and substantially all the assets of such persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of our officers or directors.

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering under a recently adopted PRC regulation; any requirement to obtain prior CSRC approval could delay this offering and failure to obtain such approval, if required, could have a material adverse effect on our business, results of operation and reputation and could also create uncertainties for this offering.

In 2006, the CSRC and five other PRC regulatory agencies jointly promulgated the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which regulates foreign investment in PRC domestic enterprises. The M&A Rule requires offshore special purpose vehicles formed for the purposes of overseas listing of equity interests in PRC companies and controlled directly or indirectly by PRC companies or individuals to obtain the approval of the CSRC prior to the listing and trading of the special purpose vehicle’s securities on an overseas stock exchange. The interpretation and application of the M&A Rule is currently unclear. If the CSRC or another PRC regulatory agency subsequently determines that prior CSRC approval was required, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations, limit our operating privileges, delay or restrict the repatriation of the proceeds from this offering into China or the payment or distribution of dividends by our PRC subsidiary, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects.

We face uncertainty regarding the PRC tax reporting obligations and consequences for certain indirect transfers of the stock of our operating company.

Under the current PRC tax regulations, indirect transfers of equity interests and other properties of PRC tax resident enterprises by non-PRC holding companies may be subject to PRC tax. In accordance with the Announcement of the State Administration of Taxation on Several Issues concerning the Enterprise Income Tax on the Indirect Transfers of Properties by Non-Resident Enterprises (“Announcement 7”) issued by the SAT on February 3, 2015, if a non-PRC tax resident enterprise indirectly transfers equities and other properties of a PRC tax resident enterprise and such indirect transfer will produce a result identical or substantially similar to direct transfer of equity interests and other properties of the PRC tax resident enterprise, the non-PRC tax resident enterprise may be subject to PRC withholding tax at a rate up to 10%. The Announcement of the State Administration of Taxation on Matters Concerning Withholding of Income Tax of Non-resident Enterprises at

 

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Source (“Announcement 37”), which was issued by SAT on October 17, 2017 and became effective on December 1, 2017, renovates the principles and procedures concerning the indirect equity transfer tax withholding for a non-PRC tax resident enterprise. Failure to comply with the tax payment obligations by a non-PRC tax resident will result in penalties, including full payment of tax owed, fines and default interest on those tax.

According to Announcement 7, where a non-resident enterprise indirectly transfers equity interests or other properties of PRC tax resident enterprises (“PRC Taxable Property”) to avoid its tax liabilities by implementing arrangements without reasonable commercial purpose, such indirect transfer shall be recharacterized and recognized as a direct transfer of PRC Taxable Property. As a result, gains derived from such indirect transfer and attributable to PRC Taxable Property may be subject to PRC withholding tax at a rate of up to 10%. In the case of an indirect transfer of property of establishments of a foreign enterprise in the PRC, the applicable tax rate would be 25%. Announcement 7 also illustrates certain circumstances which would indicate a lack of reasonable commercial purpose. Announcement 7 further sets forth certain “safe harbors” which would be deemed to have a reasonable commercial purpose. As a general principle, the SAT also issued the Administration of General Anti-Tax Avoidance (Trial Implementation) (“GATA”), which became effective on February 1, 2015 and empowers the PRC tax authorities to apply special tax adjustments for “tax avoidance arrangements.”

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC Taxable Property are involved, such as offshore restructuring, sale of the shares in our offshore subsidiary and investments. Our Company may be subject to withholding obligations if our company is transferee in such transactions, under Announcement 7 and Announcement 37. For transfer of shares in our Company by investors who are non-PRC resident enterprises, our PRC subsidiary may be required to expend valuable resources to comply with Announcement 7 and Announcement 37 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have an adverse effect on our financial condition and results of operations.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to acquire PRC companies or to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute profits to us, or otherwise materially and adversely affect us.

On July 4, 2014, China’s SAFE issued the Circular of the State Administration of Foreign Exchange on Issues concerning Foreign Exchange Administration over the Overseas Investment and Financing and Round-trip Investment by Domestic Residents via Special Purpose Vehicles, or Circular 37, which became effective as of July 4, 2014. According to Circular 37, prior registration with the local SAFE branch is required for PRC residents to contribute domestic assets or interests to offshore companies, known as SPVs. Moreover, Circular 37 applies retroactively. As a result, PRC residents who have contributed domestic assets or interest to a SPV, but failed to complete foreign exchange registration of overseas investments as required before July 4, 2014 shall send a letter to SAFE and its branches for explanation. SAFE and its branches shall, under the principle of legality and legitimacy, conduct supplementary registration, and impose administrative punishment on those in violation of the administrative provisions on the foreign exchange pursuant to the law.

We have requested our shareholders who are PRC residents to make the necessary applications, filings and amendments as required under Circular 37 and other related rules. We attempt to comply, and attempt to ensure that our shareholders who are subject to these rules comply with the relevant requirements. However, we cannot provide any assurances that all of our shareholders who are PRC residents will comply with our request to make or obtain any application registrations or comply with other requirements required by Circular 37 or other related rules. The failure or inability of our PRC resident shareholders to make any required registrations or comply with other requirements may subject such shareholders to fines and legal sanctions and may also limit our ability to contribute additional capital into or provide loans to (including using the proceeds from this offering) CSC Guangzhou, limiting the ability of CSC Guangzhou to pay dividends or otherwise distribute profits to us.

 

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Failure to comply with the individual Foreign Exchange Rules relating to the overseas direct investment or the engagement in the issuance or trading of securities overseas by our PRC resident shareholders may subject such shareholders to fines or other liabilities.

Other than Circular 37, our ability to conduct foreign exchange activities in China may be subject to interpretation and enforcement of the Implementation Rules of the Administrative Measures for Individual Foreign Exchange promulgated by SAFE in January 2007 (as amended and supplemented, the “Individual Foreign Exchange Rules”). Under the Individual Foreign Exchange Rules, any PRC individual seeking to make a direct investment overseas or engage in the issuance or trading of negotiable securities or derivatives overseas must make the appropriate registrations in accordance with SAFE provisions. PRC individuals who fail to make such registrations may be subject to warnings, fines or other liabilities.

We may not be fully informed of the identities of all our beneficial owners who are PRC residents. For example, because the investment in or trading of our shares will happen in an overseas public or secondary market where shares are often held with brokers in brokerage accounts, it is unlikely that we will know the identity of all of our beneficial owners who are PRC residents. Furthermore, we have no control over any of our future beneficial owners and we cannot assure you that such PRC residents will be able to complete the necessary approval and registration procedures required by the individual Foreign Exchange Rules.

It is uncertain how the individual Exchange Rules will be interpreted or enforced and whether such interpretation or enforcement will affect our ability to conduct foreign exchange transactions. Because of this uncertainty, we cannot be sure whether the failure by any of our PRC resident shareholders to make the required registration will subject our subsidiaries to fines or legal sanctions on their operations, delay or restriction on repatriation of proceeds of this offering into the China, restriction on remittance of dividends or other punitive action that would have a material adverse effect on our business, results of operations and financial condition.

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

In utilizing the proceeds from this public offering or any future offerings, as an offshore holding company of our PRC subsidiary, we may make loans to our PRC subsidiary and controlled PRC affiliate, or we may make additional capital contributions to our PRC subsidiary. Any loans to our PRC subsidiary or controlled PRC affiliate are subject to PRC regulations and approvals. For example, loans by us to our PRC subsidiary in China, each of which is a foreign-invested enterprise, to finance their activities cannot exceed statutory limits and must be registered with SAFE or its local counterpart.

We may also decide to finance our PRC subsidiary through capital contributions. These capital contributions must be approved by the Ministry of Commerce in China or its local counterpart. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or controlled PRC affiliate or capital contributions by us to our subsidiaries or any of their respective subsidiaries. If we fail to receive such registrations or approvals, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely and materially affect our liquidity and our ability to fund and expand our business.

On March 30, 2015, the SAFE issued the Circular on Reforming the Administration Approach Regarding the Foreign Exchange Capital Settlement of Foreign-invested Enterprises (“Circular 19”), which became effective on June 1, 2015. Circular 19 provides that the conversion from foreign currency registered capital of foreign-invested enterprises into the Renminbi capital may be at foreign-invested enterprises’ discretion, which means that the foreign currency registered capital of foreign-invested enterprises for which the rights and interests of monetary contribution has been confirmed by the local foreign exchange bureau (or the book-entry of monetary

 

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contribution has been registered) can be settled at the banks based on the actual operational needs of the enterprises.

Further, according to Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within China, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in China in actual practice.

On June 9, 2016, the SAFE promulgated the Circular on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange (“Circular 16”), which applies to all domestic enterprises in China. Circular 16 reiterates some of the rules set forth in Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises.

Circular 19 and Circular 16 may significantly limit the ability of our PRC subsidiary and the operating companies in China to transfer and use Renminbi funds from its foreign currency denominated capital, which may adversely affect our business, financial condition and results of operations.

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we received from our initial public offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

We must remit the offering proceeds to our WFOE in China before they may be used to benefit our business in China, this process may take a number of months and we will be unable to use the proceeds to grow our business in the meantime.

The proceeds of this offering must be sent back to China, and the process for sending such proceeds back to our WFOE in China may take several months after the closing of this offering. In order to remit the offering proceeds to China, we will take the following actions:

 

   

First, we will open a special foreign exchange account for capital account transactions. To open this account, we must submit to SAFE certain application forms, identity documents, transaction documents, form of foreign exchange registration of overseas investments by domestic residents, and foreign exchange registration certificate of the invested company.

 

   

Second, we will remit the offering proceeds into this special foreign exchange account.

 

   

Third, we will apply for settlement of the foreign exchange. In order to do so, we must submit to SAFE certain application forms, identity documents, payment order to a designated person, and a tax certificate.

The timing of the process is difficult to estimate because the efficiencies of different SAFE branches can vary materially. Ordinarily, the process takes several months to complete. We may be unable to use these proceeds to grow our business until we receive such proceeds in China.

 

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We may be classified as a “resident enterprise” for PRC enterprise income tax purposes; such classification could result in unfavorable tax consequences to us and our non-PRC shareholders.

The PRC enterprise income tax law and its implementing rules provide that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” under PRC tax laws. The implementing rules define the term “de facto management bodies” as a management body which substantially manages, or has control over the business, personnel, finance and assets of an enterprise. On April 22, 2009, the State Administration of Taxation issued Circular 82, which provides that a foreign enterprise controlled by a PRC company or a group of PRC companies will be classified as a “resident enterprise” with its “de facto management body” located within China if all of the following requirements are satisfied: (1) the senior management and core management departments in charge of its daily operations function are mainly in China; (2) its financial and human resources decisions are subject to determination or approval by persons or bodies in China; (3) its major assets, accounting books, company seals, and minutes and files of its board and shareholders’ meetings are located or kept in China; and (4) at least half of the enterprise’s directors with voting right or senior management reside in China. The State Administration of Taxation issued a bulletin on August 3, 2011 to provide more guidance on the implementation of Circular 82, or Bulletin 45. Bulletin 45 clarifies certain matters relating to resident status determination, post-determination administration and competent tax authorities.

In addition, the State Administration of Taxation issued a bulletin on January 29, 2014 to provide more guidance on the implementation of Circular 82. This bulletin further provides that, among other things, an entity that is classified as a “resident enterprise” in accordance with the circular shall file the application for classifying its status of residential enterprise with the local tax authorities where its main domestic investors are registered. From the year in which the entity is determined to be a “resident enterprise,” any dividend, profit and other equity investment gain shall be taxed in accordance with the enterprise income tax law and its implementing rules.

Currently, there are no detailed rules or precedents governing the procedures and specific criteria for determining de facto management bodies which are applicable to our company or our overseas subsidiary. If our company or any of our overseas subsidiaries is considered a PRC tax resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, our company or our overseas subsidiary will be subject to the uniform 25% enterprise income tax rate as to our global income as well as PRC enterprise income tax reporting obligations. Second, although under the Enterprise Income Tax Law and its implementing rules dividends paid to us from our PRC subsidiary would qualify as tax-exempted income, we cannot assure you that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, dividends payable by us to our investors and gain on the sale of our shares may become subject to PRC withholding tax. It is possible that future guidance issued with respect to the new resident enterprise classification could result in a situation in which a withholding tax of 10% for our non-PRC enterprise investors or a potential withholding tax of 20% for individual investors is imposed on dividends we pay to them and with respect to gains derived by such investors from transferring our shares. In addition to the uncertainty in how the new resident enterprise classification could apply, it is also possible that the rules may change in the future, possibly with retroactive effect. If we are required under the Enterprise Income Tax law to withhold PRC income tax on our dividends payable to our foreign shareholders, or if we are required to pay PRC income tax on the transfer of our shares under the circumstances mentioned above, the value of your investment in our shares or ADSs may be materially and adversely affected. It is unclear whether, if we are considered a PRC resident enterprise, holders of our shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas.

 

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Our current employment practices may be restricted under the PRC Labor Contract Law and our labor costs may increase as a result.

The PRC Labor Contract Law and its implementing rules impose requirements concerning contracts entered into between an employer and its employees and establishes time limits for probationary periods and for how long an employee can be placed in a fixed-term labor contract. Because the Labor Contract Law and its implementing rules have not been in effect very long and because there is lack of clarity with respect to their implementation and potential penalties and fines, it is uncertain how it will impact our current employment policies and practices. We cannot assure you that our employment policies and practices do not, or will not, violate the Labor Contract Law or its implementing rules and that we will not be subject to related penalties, fines or legal fees. If we are subject to large penalties or fees related to the Labor Contract Law or its implementing rules, our business, financial condition and results of operations may be materially and adversely affected. In addition, according to the Labor Contract Law and its implementing rules, if we intend to enforce the non-compete provision with an employee in a labor contract or non-competition agreement, we have to compensate the employee on a monthly basis during the term of the restriction period after the termination or ending of the labor contract, which may cause extra expenses to us. Moreover, the Labor Contract Law and its implementation rules require certain terminations to be based upon seniority rather than merit, which significantly affects the cost of reducing workforce for employers. In the event we decide to significantly change or decrease our workforce in the PRC, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our circumstances or in a timely and cost effective manner, thus our results of operations could be adversely affected.

Furthermore, the economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension, housing fund, medical insurance, on-the-job injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increased labor costs to our users by increasing the fees of our services, our financial condition and results of operations may be adversely affected.

Risks Related to this Offering and Ownership of our Ordinary Shares

There has been no public market for our ordinary shares prior to this offering, and you may not be able to resell our ordinary shares at or above the price you paid, or at all.

Prior to this initial public offering, there has been no public market for our ordinary shares. We intend to list our ordinary stock on the NASDAQ. If an active trading market for our ordinary shares does not develop after this offering, the market price and liquidity of our ordinary shares will be materially and adversely affected. Negotiations with the underwriters will determine the initial public offering price for our ordinary shares which may bear no relationship to their market price after the initial public offering. We cannot assure you that an active trading market for our ordinary shares will develop or that the market price of our ordinary shares will not decline below the initial public offering price.

If we are listed on the NASDAQ Capital Market, we may not meet the continued listing standards of the NASDAQ Capital Market.

The NASDAQ Capital Market requires companies to fulfill specific requirements in order for their shares to continue to be listed. If our shares are listed on the NASDAQ Capital Market but are delisted from the NASDAQ Capital Market at some later date, our shareholders could find it difficult to sell our shares. In addition, if our ordinary shares are delisted from the NASDAQ Capital Market at some later date, we may apply to have our

 

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ordinary shares quoted on the Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. The Bulletin Board and the “pink sheets” are generally considered to be less efficient markets than the NASDAQ Capital Market. In addition, if our ordinary shares are not so listed or are delisted at some later date, our ordinary shares may be subject to the “penny stock” regulations. These rules impose additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors and require the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our ordinary shares might decline. If our ordinary shares are not so listed or are delisted from the NASDAQ Capital Market at some later date or become subject to the penny stock regulations, it is likely that the price of our shares would decline and that our shareholders would find it difficult to sell their shares.

If a limited number of participants in this offering purchase a significant percentage of the offering, the effective public float may be smaller than anticipated and the price of our ordinary shares may be volatile.

As a company conducting a relatively modest public offering, we are subject to the risk that a small number of investors will purchase a high percentage of the offering. If this were to happen, investors could find our shares to be more volatile than they might otherwise anticipate. Companies that experience such volatility in their stock price may be more likely to be the subject of securities litigation. In addition, if a large portion of our public float were to be held by a few investors, smaller investors may find it more difficult to sell their shares.

The market price for our shares may be volatile.

The trading prices of our ordinary shares are likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, like the performance and fluctuation in the market prices or the underperformance or deteriorating financial results of internet or other companies based in China that have listed their securities in the United States in recent years. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial decline in their trading prices. The trading performances of other PRC companies’ securities after their offerings may affect the attitudes of investors toward PRC companies listed in the United States, which consequently may impact the trading performance of our ordinary shares, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other PRC companies may also negatively affect the attitudes of investors towards PRC companies in general, including us, regardless of whether we have conducted any inappropriate activities. In addition, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, which may have a material adverse effect on the market price of our shares. In addition to the above factors, the price and trading volume of our ordinary shares may be highly volatile due to multiple factors, including the following:

 

   

regulatory developments affecting us, our users, or our industry;

 

   

regulatory uncertainties with regard to our variable interest entity arrangements;

 

   

announcements of studies and reports relating to our service offerings or those of our competitors;

 

   

actual or anticipated fluctuations in our results of operations and changes or revisions of our expected results;

 

   

changes in financial estimates by securities research analysts;

 

   

announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures or capital commitments;

 

   

additions to or departures of our senior management;

 

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detrimental negative publicity about us, our management or our industry;

 

   

fluctuations of exchange rates between the Renminbi and the U.S. dollar;

 

   

release or expiry of lock-up or other transfer restrictions on our outstanding shares of ordinary shares; and

 

   

sales or perceived potential sales of additional shares of ordinary shares.

Shares eligible for future sale may adversely affect the market price of our ordinary shares, as the future sale of a substantial amount of outstanding ordinary shares in the public marketplace could reduce the price of our ordinary shares.

The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise through future offerings of our ordinary shares. An aggregate of 148,390,000 shares were outstanding before the consummation of this offering and 149,140,000 shares will be outstanding immediately after this offering. All of the shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act.

You will experience immediate and substantial dilution.

The initial public offering price of our shares is expected to be substantially higher than the pro forma net tangible book value per share of our ordinary shares. Assuming the completion of the offering, if you purchase shares in this offering, you will incur immediate dilution of approximately $3.78 or approximately 95% in the pro forma net tangible book value per share from the price per share that you pay for the shares. Accordingly, if you purchase shares in this offering, you will incur immediate and substantial dilution of your investment. See “Dilution.”

We are subject to certain risks in connection with the Share Escrow Plan.

We plan to enter into a share escrow agreement in connection with this offering under which, with the exception of Henz Real Estate Development Limited, our shareholders as of the date of this prospectus will agree to place 95% of their ordinary shares (133,922,975 ordinary shares in aggregate) in an escrow account held by the escrow agent (the “Share Escrow Plan”). Under the Share Escrow Plan, all of the escrowed shares will be released if our net income for any fiscal year during the three years ended March 31, 2021 meets a target of approximately $28.8 million in net income (excluding the impact of any compensation expense as a result of the implementation of the Share Escrow Plan), provided that if such target is not met, the escrowed shares will be released based on actual net income achieved and conditions set forth in the share escrow agreement. Any escrowed shares that have not been released will be cancelled upon the termination of the Share Escrow Plan. See “Shares Eligible for Future Sale—Share Escrow Plan”. Our ability to achieve the target net income may also be affected by the new accounting standards to be adopted beginning in fiscal year 2019. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Accounting Developments”. If, upon the termination of the Share Escrow Plan, the ordinary shares beneficially owned by Mr. Xu He no longer entitle him to control over 50% of the voting power of our company, change of control would be resulted. We expect to incur significant non-cash compensation expenses in connection with the release of 49.8% of the escrowed shares beneficially owned by certain of our directors, officers and employees. The compensation expenses will be recognized based on the fair value of such escrowed shares on the relevant release dates and, as such, we are unable to estimate or quantify such compensation expenses with certainty. In addition, as the per share amounts and number of shares outstanding for each of 2019, 2020 and 2021 will be retroactively restated to reflect changes in capital structure, the release of the escrowed shares are expected to result in diluted earnings per share.

 

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Our chief executive officer will be able to control and exert significance influence over our company following this offering, and his interest may be different from or conflict with that of our other shareholders.

Our chief executive officer, Mr. Xu He, beneficially owns the ordinary shares of our company, and has the power to direct the voting of Dawnlight Limited over our company through a shareholders agreement. Mr. Xu He and Dawnlight Limited will therefore collectively control more than 50% of the voting power of our company after the offering. As more than 50% of the voting power for the election of directors is held or directed by Mr. Xu He following this offering, we are a “controlled company” as defined under Rule 5615(c)(1) of the NASDAQ Listing Rules. See “Principal Shareholders.” In addition to the elections of our directors, Mr. Xu He is and will continue to be able to exert a significant degree of influence or actual control over other management and affairs and control matters requiring an approval from a majority of shareholders, including the merger, consolidation or sale of all or substantially all of our assets, and any other significant transaction. Mr. Xu He’s interest might not always coincide with the interests of our other shareholders. For instance, this concentration of voting power and/or the restrictions imposed by the shareholders agreement between, among others, Mr. Xu He and Dawnlight Limited, may have the effect of delaying or preventing a change in control of us otherwise favored by our shareholders and could depress our stock price.

We have not finally determined the use of the proceeds from this offering, and we may use the proceeds in ways with which you may not agree.

While we have identified the priorities to which we expect to put the proceeds of this offering, our management will have considerable discretion in the application of the net proceeds received by us. Specifically, we intend to use the net proceeds from this offering to support the expansion of our operations and for working capital and general corporate purposes. We have reserved the right to re-allocate funds currently allocated to that purpose to our general working capital. If that were to happen, then our management would have significant discretion over even more of the net proceeds to be received by our company in this offering. You will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve profitability or increase our stock price. The net proceeds from this offering may be placed in investments that do not produce profit or increase value. See “Use of Proceeds.”

We are a BVI company and, because judicial precedent regarding the rights of shareholders is more limited under BVI law than under U.S. law, you may have less protection for your shareholder rights than you would under U.S. law.

Our corporate affairs are governed by our Memorandum and Articles of Association, the BVI Business Companies Act 2004, as amended (the “BVI Act”) and the common law of the BVI. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary responsibilities of our directors to us under BVI law are to a large extent governed by the common law of the BVI. The common law of the BVI is derived in part from comparatively limited judicial precedent in the BVI as well as that from English common law, which has persuasive, but not binding, authority on a court in the BVI. The rights of our shareholders and the fiduciary responsibilities of our directors under BVI law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the BVI has a different body of securities laws than the United States. In addition, some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the BVI. There is no statutory recognition in the BVI of judgments obtained in the United States, although the courts of the BVI will in certain circumstances recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as shareholders of a U.S. public company.

 

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We are a foreign private issuer and, as a result, will not be subject to U.S. proxy rules and will be subject to more lenient and less frequent Exchange Act reporting obligations than a U.S. issuer.

Upon consummation of this offering, we will report under the Securities Exchange Act as a foreign private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including:

 

   

the sections of the Exchange Act that regulate the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

 

   

the sections of the Exchange Act that require insiders to file public reports of their stock ownership and trading activities and impose liability on insiders who profit from trades made in a short period of time; and

 

   

the rules under the Exchange Act that require the filing of quarterly reports on Form 10-Q containing unaudited financial and other specified information and current reports on Form 8-K upon the occurrence of specified significant events.

In addition, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year, while U.S. domestic issuers that are not large accelerated filers or accelerated filers are required to file their annual report on Form 10-K within 90 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation FD, aimed at preventing issuers from making selective disclosures of material information. As a result, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.

We will incur increased costs as a result of being a publicly-traded company.

As a company with publicly-traded securities, we will incur additional legal, accounting and other expenses not presently incurred. In addition, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as well as rules promulgated by the SEC and the national securities exchange on which we list, requires us to adopt corporate governance practices applicable to U.S. public companies. These rules and regulations will increase our legal and financial compliance costs.

As an “emerging growth company” under the Jumpstart Our Business Startups Act, or JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements.

As an “emerging growth company” under the JOBS Act, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. We are an emerging growth company until the earliest of:

 

   

the last day of the fiscal year during which we have total annual gross revenues of $1.07 billion or more;

 

   

the last day of the fiscal year following the fifth anniversary of this offering;

 

   

the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; or

 

   

the date on which we are deemed a “large accelerated issuer” as defined under the federal securities laws.

For so long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to 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 for up to five fiscal years after the date of this offering. We cannot predict if

 

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investors will find our ordinary shares less attractive because we may rely on these exemptions. If some investors find our ordinary shares less attractive as a result, there may be a less active trading market for our ordinary shares and the trading price of our ordinary shares may be more volatile. In addition, our costs of operating as a public company may increase when we cease to be an emerging growth company.

We expect to be classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ordinary shares.

Under the Internal Revenue Code of 1986, as amended, we will be a passive foreign investment company (“PFIC”) for any taxable year in which, after the application of certain look-through rules with respect to subsidiaries, either (i) at least 75% of our gross income consists of passive income or (ii) at least 50% of the average quarterly value of our assets consists of assets that produce, or are held for the production of, passive income. Passive income generally includes dividends, interest, certain non-active rents and royalties, and capital gains. Based on our current operations, business plan, income, assets and certain estimates and projections, including as to the relative values of our assets, we expect to be a PFIC for the current taxable year. However, because PFIC status is determined on an annual basis, and therefore our PFIC status for the current taxable year and any future taxable year will depend upon the future composition of our income and assets, there can be no assurance that we will, or will not, be a PFIC for any taxable year.

If we are a PFIC for any taxable year during which a U.S. investor holds ordinary shares, we generally would continue to be treated as a PFIC with respect to that U.S. investor for all succeeding years during which the U.S. investor holds ordinary shares, even if we ceased to meet the threshold requirements for PFIC status. Such a U.S. investor may be subject to adverse U.S. federal income tax consequences, including (i) the treatment of all or a portion of any gain on disposition as ordinary income, (ii) the application of a deferred interest charge on such gain and the receipt of certain dividends and (iii) compliance with certain reporting requirements. We do not intend to provide the information that would enable investors to make a qualified electing fund election that could mitigate the adverse U.S. federal income tax consequences should we be classified as a PFIC.

For further discussion, see “Tax Matters Applicable to U.S. Holders of Our Shares”.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price for our ordinary shares and trading volume could decline.

The trading market for our ordinary shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who cover us downgrade our ordinary shares or publish inaccurate or unfavorable research about our business, the market price for our ordinary shares would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume for our ordinary shares to decline.

Our corporate structure, together with applicable law, may impede shareholders from asserting claims against us and our principals.

All of our operations and records, and all of our senior management are located in China. Shareholders of companies such as ours have limited ability to assert and collect on claims in litigation against such companies and their principals. In addition, China has very restrictive secrecy laws that prohibit the delivery of many of the financial records maintained by a business located in China to third parties absent PRC government approval. Since discovery is an important part of proving a claim in litigation, and since most if not all of our records are in China, PRC secrecy laws could frustrate efforts to prove a claim against us or our management. In addition, in order to commence litigation in the United States against an individual such as an officer or director, that individual must be served. Generally, service requires the cooperation of the country in which a defendant resides. China has a history of failing to cooperate in efforts to effect such service upon PRC citizens in China.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements in this prospectus, including under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Our Business” and elsewhere that constitute forward-looking statements. Forward-looking statements involve risks and uncertainties, such as statements about our plans, objectives, expectations, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plan,” “project,” “potential,” “continue,” “ongoing,” “expect,” “aim,” “believe,” “intend,” “may,” “should,” “will,” “is/are likely to,” “could” and similar expressions denoting uncertainty or an action that may, will or is expected to occur in the future. These statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from any future results, performances or achievements expressed or implied by the forward-looking statements.

Examples of forward-looking statements include statements relating to:

 

   

our business strategies, goals and objectives;

 

   

our future business development, financial condition and results of operations;

 

   

our expectations regarding demand for and market acceptance of our existing and future products and services;

 

   

projections of revenue, earnings, capital structure and other financial items;

 

   

the capabilities of our business operations;

 

   

expected future economic performance;

 

   

general economic and business conditions in the markets in which we operate;

 

   

relevant government policies and regulations relating to our industry;

 

   

competition in our market; and

 

   

assumptions underlying statements regarding us, our business or the corporate private equity fund management sector in China.

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Prospectus Summary — Our Challenges and Risks,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Regulation” and other sections in this prospectus. You should thoroughly read this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus contains certain data and information that we obtained from various government and private publications as well as a report issued by CIC, a PRC consulting and market research firm. Statistical data in these publications and the report also include projections based on a number of assumptions. The private equity fund management industry may not grow at the rate projected by market data, or at all. Failure of this market to grow at the projected rate may have a material and adverse effect on our business and the market price of our

 

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ordinary shares. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from the sale of ordinary shares of approximately $16.83 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses. If the underwriters’ option to purchase additional ordinary shares is exercised in full, we estimate that we will receive net proceeds of approximately $19.55 million, after deducting estimated underwriting discounts and commissions and estimated offering expenses. The net proceeds from this offering must be remitted to China before we will be able to use the funds to grow our business. The procedure to remit funds may take several months after completion of this offering, and we will be unable to use the offering proceeds in China until remittance is completed.

We plan to use the net proceeds of this offering primarily to support the expansion of our operations and for general corporate purposes, which may include hiring additional sales, marketing and fund management personnel, and investing in sales and marketing activities, capital expenditures and other general and administrative matters. In addition, approximately $500,000 of the net proceeds will be used to fund an escrow account to indemnify the underwriters, which sum could be returned to us after two years from the date of this offering.

The precise amounts and percentage of proceeds we would devote to particular categories of activity will depend on prevailing market and business conditions as well as on the nature of particular opportunities that may arise from time to time. This expected use of our net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including any unforeseen cash needs. Similarly, the priority of our prospective uses of proceeds will depend on business and market conditions are they develop. Accordingly, our management will have significant flexibility and broad discretion in applying the net proceeds of the offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. In utilizing the proceeds of this offering, we are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans or make additional capital contributions to our PRC subsidiary to fund its capital expenditures or working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. Pending remitting the offering proceeds to the PRC, we intend to invest our net proceeds in short-term, interest bearing, investment-grade obligations.

 

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DIVIDEND POLICY

The holders of our ordinary shares are entitled to dividends out of funds legally available when and as declared by our board of directors. Our board of directors has never declared a dividend and does not anticipate declaring a dividend in the foreseeable future. Should we decide in the future to pay dividends, as a holding company, our ability to do so and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiary and other holdings and investments. In addition, the operating companies may, from time to time, be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions. In the event of our liquidation, dissolution or winding up, holders of our ordinary shares are entitled to receive, ratably, the net assets available to shareholders after payment of all creditors. In particular, PRC regulations may restrict the ability of CSC Guangzhou to pay dividends to us. See “Regulation — Regulations Related to Foreign Exchange and Dividend Distribution.”

 

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EXCHANGE RATE INFORMATION

Substantially all of our operations are conducted in China and substantially all of our revenues, costs and expenses are denominated in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. The conversion of Renminbi into U.S. dollars in this prospectus is based on the rate certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, all translations from Renminbi to U.S. dollars has been made at a rate of RMB6.6171 to $1.00, the noon buying rate in effect as of June 29, 2018. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus should have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all. The PRC government imposes controls over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On November 23, 2018, the noon buying rate was RMB6.9477 to $1.00. See “Risk Factors — Risks Related to Our Business and Industry — Our profitability may be seriously affected by fluctuations in exchange rates between the Renminbi and the U.S. dollar.”

The following table sets forth information concerning the exchange rates between the Renminbi and the U.S. dollar for the periods indicated.

 

     Exchange Rate  

Period

   Period End      Average(1)      Low      High  
     (RMB per US$1.00)  

2013

     6.0537        6.1412        6.0537        6.2438  

2014

     6.2046        6.1704        6.0402        6.2591  

2015

     6.4778        6.2869        6.2046        6.4778  

2016

     6.9430        6.6400        6.9580        6.4480  

2017

     6.5063        6.7564        6.4773        6.9575  

2018

           

March

     6.2726        6.3174        6.2726        6.3565  

April

     6.3325        6.2967        6.2655        6.3340  

May

     6.4096        6.3701        6.4175        6.3325  

June

     6.6171        6.4651        6.6235        6.3850  

July

     6.8038        6.7164        6.8102        6.6123  

August

     6.8300        6.8453        6.9330        6.8018  

September

     6.8680        6.8551        6.8270        6.8880  

October

     6.9737        6.9191        6.8680        6.9737  

November (through November 23)

     6.9477        6.9329        6.8894        6.9553  

 

Source: Federal Reserve 11-10 Statistical Release

Note:

 

(1)

Determined by averaging the rates on the last business day of each month during the relevant year, except for the monthly average rate which is determined by averaging the daily rates during the month.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2018:

 

   

On an actual basis; and

 

   

On a pro forma basis to give effect to the sale of 5,000,000 ordinary shares by us in this offering at the assumed initial public offering price of $4.00 per share, after deducting the estimated underwriting commissions and estimated offering expenses and assuming that the underwriters do not exercise their over-allotment option.

You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.”

As of June 30, 2018

 

     As Reported     Pro Forma
Adjusted for IPO (1)
 

Ordinary shares

    

Shares (2)

     148,390,000       153,390,000  

Par Value Amount

   $ 148,390     $ 153,390  

Call-up Capital

   $ —       $ —    

Additional Paid-In Capital

   $ 588,302     $ 17,415,744  

Retained Earnings

   $ 15,771,502     $ 15,771,502  

Accumulated Other Comprehensive Income

   $ (327,042   $ (327,042
  

 

 

   

 

 

 

Total

   $ 16,181,152     $ 33,013,594  
  

 

 

   

 

 

 

 

(1)

Gives effect to the sale of 5,000,000 shares at the offering price of $4.00 per share, and to reflect the application of the proceeds after deducting a 8% underwriting discount, and our estimated offering expenses of $1,567,558.

 

(2)

On October 29, 2018, we completed our share redemption through a one-for-zero point seven one (1 for 0.71) reverse stock split of our company’s issued and outstanding ordinary shares. All number of shares, share amounts and per share data has been retrospectively restated to reflect such reverse stock split for all periods presented. See note 12 to our consolidated financial statements included herein.

 

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DILUTION

If you invest in our shares, your interest will be diluted to the extent of the difference between the initial public offering price per ordinary share and the pro forma net tangible book value per common share after the offering. The net tangible book value of our ordinary shares as of June 30, 2018 was $16,181,152, or $0.11 per share based upon 148,390,000 ordinary shares outstanding. 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 ordinary shares outstanding.

Dilution results from the fact that the per ordinary share offering price is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares. After giving effect to our issuance and sale of 5,000,000 ordinary shares in this offering at an assumed initial public offering price of $4.00 per share, after deducting the estimated underwriting discounts and offering expenses payable by us, the pro forma as adjusted net tangible book value as of June 30, 2018 would have been $33,013,594, or $0.22 per share. This represents an immediate increase in net tangible book value to existing shareholders of $0.11 per share and an immediate decrease in net tangible book value of $3.78 per share to new investors purchasing the shares in this offering. The following table illustrates this per share dilution to the new investors purchasing shares in this offering:

 

     Offering  

Assumed offering price per ordinary share

   $ 4.00  

Net tangible book value per ordinary share before the offering

   $ 0.11  

Increase per ordinary share attributable to this offering

   $ 0.11  

Pro forma net tangible book value per ordinary share after the offering

   $ 0.22  

Dilution per ordinary share to new investors

   $ 3.78  

Our adjusted pro forma net tangible book value after the offering, and the decrease to new investors in the offering, will change from the amounts shown above if the underwriter’s over-allotment option is exercised.

If the underwriter’ over-allotment option of 750,000 share is exercised in full, the pro forma net tangible book value per common share would be $0.23 per share, and the dilution per common share to new investors in this offering would be $3.77 per share.

A $1.00 increase (decrease) in the assumed public offering price of $4.00 per share would increase (decrease) the pro forma net tangible book value by $4,525,000, the pro forma net tangible book value per share after this offering by $0.02 ($0.03) per share and the dilution in pro forma net tangible book value per share to investors in this offering by $0.98 ($0.97) per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following summary consolidated statements of income and comprehensive income data for the years ended March 31, 2017 and 2018, and summary consolidated balance sheets data as of March 31, 2017 and 2018 and summary consolidated cash flow data for the years ended March 31, 2017 and 2018 which have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The following summary consolidated statements of income and comprehensive income data for the three months ended June 30, 2017 and 2018, and summary consolidated balance sheets data as of June 30, 2018 and summary consolidated cash flow data as of June 30, 2017 and 2018 which have been derived from our unaudited condensed consolidated interim financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. Our consolidated financial statements are prepared and presented in accordance with the generally accepted accounting principles in the United States of America, or U.S. GAAP. You should read this Summary Consolidated Financial Data and Summary Operating Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results are not necessarily indicative of results expected for future periods.

Summary Consolidated Statements of Income and Comprehensive Income Data

 

     For the year ended March 31,      For the three months ended June 30,  
     2017     2018      2017      2018  

Revenue

          

Financial advisory fees

   $ 3,476,090     $ 711,428      $ 687,546      $  

Subscription fees

     876,120       2,917,427        499,438        155,038  

Management fees

     473,797       4,418,873        469,285        2,076,084  

Realized carried interest

           2,138,305               546,863  

Unrealized carried interest

     1,617,201       2,580,508        1,121,594        19,833,846  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total net revenues

     6,443,208       12,766,541        2,777,863            22,611,831  
  

 

 

   

 

 

    

 

 

    

 

 

 

Operation Cost and Expenses

          

Distribution and servicing costs

     1,726,014       4,592,080        535,135        1,557,237  

Carried interest related compensation

     229,161       1,561,803        97,334        6,471,646  

Selling expenses

     502,354       1,291,990        239,779        388,592  

General and administrative expenses

     368,907       1,668,229        247,619        631,693  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total expenses

     2,826,436       9,114,102        1,119,867        9,049,168  
  

 

 

   

 

 

    

 

 

    

 

 

 

Investment Income

          

Net gains from investment activities

           208,480        7,059        55,450  
  

 

 

   

 

 

    

 

 

    

 

 

 

Total Investment income

           208,480        7,059        55,450  
  

 

 

   

 

 

    

 

 

    

 

 

 

Income before income taxes provision

     3,616,772       3,860,919        1,665,055        13,618,113  

Income tax provisions (benefit)

     909,783       975,182        422,447        3,409,296  
  

 

 

   

 

 

    

 

 

    

 

 

 

Net income

   $ 2,706,989     $ 2,885,737      $ 1,242,608      $ 10,208,817  

Other comprehensive income (loss)

          

Foreign currency translation adjustment

     (61,403     428,929        52,407        (694,646
  

 

 

   

 

 

    

 

 

    

 

 

 

Total comprehensive income

   $ 2,645,586       3,314,666      $ 1,295,015      $ 9,514,171  
  

 

 

   

 

 

    

 

 

    

 

 

 

Earnings (losses) per common share*

          

Basic

   $ 0.0182     $ 0.0194      $ 0.0084      $ 0.0688  
  

 

 

   

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.0182     $ 0.0194      $ 0.0084      $ 0.0688  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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     For the year ended March 31,      For the three months ended June 30,  
     2017      2018      2017      2018  

Weighted average common shares* outstanding

           

Basic

     148,390,000        148,390,000        148,390,000        148,390,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     148,390,000        148,390,000        148,390,000        148,390,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

The shares are presented on a retroactive basis to reflect our share redemption through a one-for-zero point seven one (1 for 0.71) reverse stock split of our company’s issued and outstanding ordinary shares on October 29, 2018. See note 12 to our consolidated financial statements included herein.

Summary Consolidated Balance Sheet Data:

 

     As of
March 31,
2017
     As of
March 31,
2018
     As of June 30,
2018
 

Total assets

   $ 7,283,491      $ 25,217,841      $ 44,381,235  

Total liabilities

     4,667,868        18,759,860        28,200,083  

Total stockholders’ equity

     2,615,623        6,457,981        16,181,152  

Summary Consolidated Cash Flow Data:

 

     For the year ended March 31,     For the three months ended June 30,  
     2017     2018     2017     2018  

Net cash provided by (used in) operating activities

   $ 2,740,172     $ 4,049,540     $ (124,293   $ 253,141  

Net cash provided by (used in) investing activities

     (282,696     (1,656,227     (2,089,595     (792,039

Net cash provided by financing activities

     (65,617     520,980       377,144       209,000  

Effect of exchange rate change on cash and cash equivalents

     (59,989     370,374       6,031       (260,697

Cash and cash equivalents, beginning balance

     62,825       2,394,695       2,394,695       5,679,362  

Cash and cash equivalents, ending balance

   $ 2,394,695       5,679,362               563,982               5,088,767  

 

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POST-OFFERING OWNERSHIP

The following charts illustrate our pro forma proportionate ownership, upon completion of this offering by present shareholders and investors in this offering, compared to the relative amounts paid by each. The charts reflect payment by present shareholders as of the date the consideration was received and by investors in this offering at the assumed offering price without deduction of commissions or expenses. The charts further assume no changes in net tangible book value other than those resulting from the offering.

 

     Shares Purchased     Total Consideration     Average Price  
     Number of Shares     Percent (%)     Amount ($)      Percent (%)     Per Share ($)  

Existing shareholders

     148,390,000     96.7     148,390        0.7     0.001  

New investors

     5,000,000       3.3     20,000,000        99.3     4.00  

Total

     153,390,000       100     20,148,390        100  

The chart below illustrates our pro forma proportionate ownership if the over-allotment option is exercised:

 

     Shares Purchased     Total Consideration     Average Price  
     Number of Shares     Percent (%)     Amount ($)      Percent (%)     Per Share ($)  

Existing shareholders

     148,390,000     96.3     148,390        0.6     0.001  

New investors

     5,750,000       3.7     23,000,000        99.4     4.00  

Total

     154,140,000       100     23,148,390        100  

 

*

Pursuant to our share escrow agreement to be entered into in connection with this offering, with exception of Henz Real Estate Development Limited, our shareholders as of the date of this prospectus will place an aggregate of 133,922,975 ordinary shares into escrow all or part of which may be cancelled in accordance with terms and conditions set forth in the share escrow agreement. See “Shares Eligible for Future Sale—Share Escrow Plan”.

If the underwriter’ over-allotment option of 750,000 shares is exercised in full, the number of shares held by existing shareholders will be reduced to 96.3% of the total number of shares to be outstanding after this offering; and the number of shares held by the new investors will be increased to 5,750,000 shares, or 3.7%, of the total number of shares outstanding after this offering.

 

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MANAGEMENTS DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Unless otherwise indicated, all share amounts and per share amounts in this prospectus have been presented on a pro-forma basis to reflect a share redemption through a one-for-zero point seven one (1 for 0.71) reverse stock split of the issued and outstanding ordinary shares effected on October 29, 2018.

Overview

We are a private equity fund manager in China primarily engaged in the management of private equity funds. Currently, we focus our investments primarily on China-based companies that are publicly listed or seeking to list in the United States, often referred to as U.S. China concepts stocks, particularly on companies in the TMT sector such as new economy companies. Our investments in such companies comprise all stages of the investment cycle: pre-IPO investments, IPO subscriptions, post-IPO secondary market investments (most often in the form of PIPE transactions) and privatizations. As we are a relatively young private equity fund manager in China with a limited operating history, our current business model is to identify investment targets first and raise capital to fund targeted transactions on a deal-by-deal basis as opposed to calling capital from committed investors. We believe that this model enables us to attract a large number of potential investors and raise capital quickly and efficiently as we are already able to present such potential investors with relatively detailed information on the pre-screened investment targets, thereby enhancing their confidence in the fund. As the investment targets are pre-identified, our ability to raise capital within a shorter period of time is critical to our ability to close the investment, which, in the longer term, is important to our reputation in China’s financial industry as well as our ability to raise capital to fund future investments. To date, we have been able to successfully close funding rounds for each of our funds generally within a short period of two to three months from the signing of a term sheet with our investment targets. During the fund raising process, we provide potential investors with information about our investment targets, including certain details in the signed term sheets such as a proposed investment target’s industry background, competitive strengths, performance history, and current stage in the investment cycle. We also provide third-party investors with financial advisory services, which primarily include identifying suitable target investment projects that fit the specific investment needs of investors based on our expertise, market resources, internal database and professional relationships with our industry peers.

We currently manage four categories of funds and one individual fund under our equity investment portfolio. The following table provides an overview of the performance of these funds as of and for the periods indicated:

 

    As of March 31, 2017           As of March 31, 2018           As of June 30, 2018              
    AUM     Total Amount of Returns           AUM     Total Amount of Returns           AUM     Total Amount of Returns              
    RMB
(in million)
    $
(in million)
    RMB
(in million)
    $
(in million)
    Net Annualized
Return from
Fund Inception
Date to
March 31, 2017
    RMB
(in million)
    $
(in million)
    RMB
(in million)
    $
(in million)
    Net Annualized
Return(1) from
Fund Inception
Date to
March 31, 2018
    RMB
(in million)
    $
(in million)
    RMB
(in million)
    $
(in million)
    Net Annualized
Return(1) from
Fund Inception
Date to
June 30, 2018
    Net IRR(2)  

East Value(3)

    366.2       55.3       44.4       6.7       42.1     2,352.3       355.5       45.5       6.9       3.1     2,895.3       437.5       764.8       115.6       38.5     39.9

Value Return

    336.4       50.8       4.2       0.6       1.9     473.3       71.5       1.1       0.2       0.1     494.0       74.7       21.8       3.3       2.4     2.3

Unicorn

    N/A       N/A       N/A       N/A       N/A       174.5       26.4       (24.5     (3.7     (293.5 %)      188.5       28.5       (25.8     (3.9     (17.2 %)      (16.8 %) 

Quantitative Hedging Funds(4)

    N/A       N/A       N/A       N/A       N/A       N/A       N/A       0.2       0.0       4.1     8.0       1.2       (0.4     (0.1     (4.2 %)      (4.1 %) 

Culture & Education

    49.3       7.5       (16.8     (2.5     (87.3 %)      42.0       6.3       (24.1     (3.6     (24.0 %)      43.5       6.6       (22.6     (3.4     (19.3 %)      (21.1 %) 

 

Note:

 

(1)

Net annualized return is calculated by averaging the total return on a yearly basis, net of all fees and expenses. Total return represents changes in the net asset value of the relevant fund calculated by comparing

 

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  changes in the net asset value as of the last date of the period with that as of the fund inception date. For fund categories, annual return represents the asset-weighted average of the yearly return for all funds falling within that category. The fluctuations in net annualized return of each of the funds set out in this table were mainly attributable to the performance of the respective funds and the general market trends during the corresponding period.

 

(2)

Net internal return rate (“IRR”) represents the annualized IRR for the period indicated on investor invested capital based on contributions, distributions and unrealized value after management fees and expenses.

 

(3)

We exited our investment in East Value series under East Value category of funds in October 2017 before the terms of the relevant funds expired. In addition, we dissolved and liquidated investments under East Value II series under the East Value fund category in the second quarter of 2018 upon expiration of the term.

 

(4)

As of March 31, 2017, no fund was established under this category. In July 2017, Asset Quantitative Hedging Strategy Fund I was established under this category with a term of six months. We dissolved this fund and liquidated its investments in January 2018 upon expiration of the term. We established Alfat II Quantitative Investment Private Fund under this category in April 2018.

The table below provides the period to period roll forward of our AUM and also reflects AUM at period end for the periods indicated.

 

     For the year ended
March 31, 2017
    For the year ended
March 31, 2018
    For the years ended
June 30, 2018
 
     AUM in
RMB
    AUM in
$US
    AUM in
RMB
     AUM in
$US
    AUM in
RMB
    AUM in
$US
 
     (in million)              

Balance, beginning of period

             

- East Value

     53.2       8.0       366.2        55.3       2,352.3       355.5  

- Value Return

     N/A       N/A       336.4        50.8       473.3       71.5  

- Unicorn

     N/A       N/A       0.0        0.0       174.5       26.4  

- Culture & Education

     N/A       N/A       49.3        7.5       42.0       6.3  

- Quantitative Hedging Funds

     N/A       N/A       0.0        0.0       0.0       0.0  

Subtotal

     53.2       8.0       751.9        113.6       3,042.1       459.7  

Gross inflows(1)

             

- East Value

     278.2       42.0       2,074.6        313.5       82.9       12.5  

- Value Return

     332.2       50.2       140.0        21.2       0.0       0.0  

- Unicorn

     N/A       N/A       199.0        30.1       15.3       2.3  

- Culture & Education

     66.1       10.0       0.0        0.0       0.0       0.0  

- Quantitative Hedging Funds

     N/A       N/A       11.3        1.7       8.6       1.3  

Subtotal

     676.5       102.2       2,424.9        366.5       106.8       16.1  

Gross outflows(2)

             

- East Value

     (4.5     (0.7     (140.2)        (21.2     (283.6     (42.9

- Value Return

     (1.5     (0.2     (2.5)        (0.4     (0.6     (0.1

- Unicorn

     N/A       N/A       (2.1)        (0.3     (1.1     (0.2

- Culture & Education

     (19.1     (2.9     (0.8)        (0.1     (0.2     0.0  

- Quantitative Hedging Funds

     N/A       N/A       (11.6)        (1.8     0.0       0.0  

Subtotal

     (25.1     (3.8     (157.2)        (23.8     (285.5     (43.2

Fair value change and others(3)

             

- East Value

     39.3       6.0       51.7        7.9       743.7       112.4  

- Value Return

     5.7       0.8       (0.6)        (0.1     21.3       3.3  

- Unicorn

     N/A       N/A       (22.4)        (3.4     (0.2     0.0  

- Culture & Education

     2.3       0.4       (6.5)        (1.1     1.7       0.3  

- Quantitative Hedging Funds

     N/A       N/A       0.3        0.1       (0.6     (0.1

Subtotal

     47.3       7.2       22.5        3.4       765.9       115.9  

Balance, end of period

             

- East Value

     366.2       55.3       2,352.3        355.5       2,895.3       437.5  

- Value Return

     336.4       50.8       473.3        71.5       494.0       74.7  

- Unicorn

     N/A       N/A       174.5        26.4       188.5       28.5  

- Culture & Education

     49.3       7.5       42.0        6.3       43.5       6.6  

- Quantitative Hedging Funds

     N/A       N/A       0.0        0.0       8.0       1.2  

Subtotal

     751.9       113.6       3,042.1        459.7       3,629.3       548.5  

 

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Note:

 

(1)

Include increased amounts contributed by new funds established and additional capital raised for existing funds.

 

(2)

Include management fees, fund custodian fees and operation services fees. There was no fund exit or dissolution for the periods presented.

 

(3)

Primarily include fair value changes in our funds calculated based on the lower of cost or fair value of raised capital and take into account fluctuations in foreign exchange rates.

Our AUM has experienced significant growth for the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2018, and is expected to continue to increase in the future. The increase in our AUM for the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2018 was primarily affected by: (i) gross inflows due to new funds established which have achieved significant growth and have been primarily concentrated under our East Value category as such category was our largest category of funds during the same period. We expect to continue to establish new funds under existing fund categories and to create new fund categories as necessary; and (ii) fair value changes in our funds which is the basis for calculating our carried interest. We recorded fair value gains primarily due to the performance of our East Value category and Value Return category of funds for the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2018. Although certain of our funds recorded negative returns for the years ended March 31, 2017 and 2018, most of these funds have already begun to deliver positive performance for the three months ended June 30, 2018. See “Our Business — Family of Funds and Investment Performance — Our Funds.” The increase in our AUM was primarily offset by gross outflows mainly as a result of the deduction of management fees, fund custodian fees and operation services fees from our funds. See “Our Business — Structure and Operation of Our Investment Funds — Fee Structure and Incentive Arrangements”. We will continue to have gross outflows due to the deduction of management fees, fund custodian fees and operation services fees in line with the expansion and operation of our funds. We expect to exit funds and make the relevant distributions in accordance with the terms of each existing fund.

For the years ended March 31, 2017 and 2018 and the three months ended June 30, 2018, we raised funds totaling $102.2 million, $366.5 million and $16.1 million, respectively. Since June 30, 2018, we established five new funds, raising a total capital of $84.1 million. See “— Recent Developments.”

We generate revenues in connection with our fund management services from subscription fees, management fees and carried interest. For the years ended March 31, 2017 and 2018 and the three months ended June 30, 2018, our revenue generated from subscription fees amounted to $876,120, $2.9 million and $155,038, respectively, accounting for 13.6%, 22.9% and 0.7% of our total revenue, respectively. For the same periods, our revenue generated from management fees amounted to $473,797, $4.4 million and $2.1 million, respectively, accounting for 7.4%, 34.6% and 9.2% of our total revenue, respectively. Our profitability is dependent upon our investment performance, which drives the value of AUM on which carried interest is calculated. We did not record any realized carried interest for the year ended March 31, 2017. We recorded realized carried interest in the amount of $2.1 million and $546,863 for the year ended March 31, 2018 and the three months ended June 30, 2018. We recorded unrealized carried interest in the amount of $1.6 million, $2.6 million and $19.8 million for the years ended 2017 and 2018 and the three months ended June 30, 2018, respectively, accounting for 25.1%, 20.2% and 87.7% of our total revenue, respectively. With respect to our financial advisory services, we charge investors for sourcing investment targets, conducting due diligence, structuring transactions, and facilitating negotiations between investors and target investment companies, and recognize financial advisory fees as services are rendered, over a period of time. For the years ended March 31, 2017 and 2018, our revenue generated from financial advisory services was $3.5 million and $711,428, respectively, accounting for 53.9%, and 5.6% of our total revenue, respectively. We did not record any financial advisory fees for the three months

 

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ended June 30, 2018 as we did not provide financial advisory services during such period. We expect that, as we continue to develop our equity investment portfolio and strengthen our reputation in the private equity sector, a substantial majority of our revenue will be derived from our fund management services going forward.

We have experienced significant growth since our inception in August 2015. For the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2018, our total revenue amounted to $6.4 million, $12.8 million and $22.6 million, respectively. Our net income amounted to $2.7 million, $2.9 million and $10.2 million, respectively, for the same periods.

Key Factors Affecting Our Results of Operations

Major factors affecting our results of operations include the following:

Ability to Raise Capital

As we are a relatively young private equity fund manager in China with a limited operating history, our current business model is to identify investment targets first and raise capital to fund those investments on a deal-by-deal basis. We believe that this model enables us to attract a large number of potential investors and raise capital quickly and efficiently as we are already able to present such potential investors with relatively detailed information on the pre-screened investment targets, thereby enhancing their confidence in the fund. As the investment targets are pre-identified, our ability to raise capital within a shorter period of time is critical to our ability to close the investment, which, in the longer term, is important to our reputation in China’s financial industry as well as our ability to raise capital to fund future investments. We do not incur any particular costs unique to our current business model. As we continue to grow the scale of our operations and our investor base as well as strengthen our reputation and profile in China’s private equity industry, we may in future solicit capital commitments from potential investors and build up committed capital reserves prior to identifying investment targets, which would enable us to generate fees from such committed capital. For the years ended March 31, 2017 and 2018 and the three months ended June 30, 2018, we raised funds totaling $102.2 million, $366.5 million and $16.1 million, respectively. Our revenue generated from management fees amounted to $473,797, $4.4 million and $2.1 million for the same periods, respectively. In addition to our ability to identify and close investments, our ability to raise capital depends on our past investment performance, relationship with the securities firms that we collaborate with, our ability to secure capital from potential and current individual investors, as well as regulatory environment surrounding currency exchange quota under the QDII program. See “Industry — Private Equity in China — The Qualified Domestic Institutional Investor Program.”

Investment Performance

Our profitability is significantly impacted by our investment performance, which drives the value of AUM on which carried interest is calculated. As discussed above, past investment performance also affects our ability to raise capital for future transactions. See “— Ability to Raise Capital” above. Investment performance is affected by company specific factors such as the financial and operating results of the investee, as well as more general factors such as economic conditions and fluctuations in the equity markets. Carried interest is usually earned when investment performance is positive. The level of carried interest that we earn is directly linked to investment returns generated by our funds. We did not record any realized carried interest for the year ended March 31, 2017. We recorded realized carried interest in the amount of $2.1 million and $546,863 for the year ended March 31, 2018 and the three months ended June 30, 2018. We recorded unrealized carried interest in the amount of $1.6 million, $2.6 million and $19.8 million for the years ended 2017 and 2018 and the three months ended June 30, 2018, respectively, accounting for 25.1%, 20.2% and 87.7% of our total revenue, respectively. As a result, the amounts recorded as carried interest, which are determined based on the fair value of the underlying investments of funds, and are classified as realized carried interest if the relevant funds are closed at the end of each reporting period or otherwise classified as unrealized carried interest, can have a significant impact on our

 

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financial results. See “Business — Family of Funds and Investment Performance.” In addition, we expect that our adopting of the new accounting standards under the “Revenue from Contracts with Customers” from April 1, 2019 would affect the recognition of unrealized carried interest from our fund management services. See “— Recent Accounting Developments”, and “Risk Factors — Risks Related to our Business and Industry — Your investment should take into account our adoption of new accounting standards beginning fiscal year 2019, as a result of which our period-to-period operating results may not be directly comparable.”

Cost Levels

Our operating costs and expenses have a significant impact on our financial results, and can vary significantly across different fund types. Total operating costs and expenses as a percentage of our revenue amounted to 43.9%, 71.4% and 40.0% for the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2018, respectively. As we raise additional funds, and as the transaction size of our investments increase, we expect our operating costs and expenses as a percentage of our revenue to decrease. Additionally, we expect the continued expansion of our business operations, which would necessarily require us to hire additional personnel and expand our office space, to add to our overall expenses. On the other hand, the cost associated with becoming a public company is expected to increase our cost level substantially. See “— Transition to Public Company Status” below. In addition, the adoption of the new accounting standards from April 1, 2019 is expected to affect the recognition of carried interest related compensation. As such, compensation is recognized in conjunction with, and calculated as a portion of, the carried interest revenue (including unrealized carried interest). If the recognition of unrealized carried interest is delayed, the recognition of correlated carried interest compensation would be delayed as well. See “— Recent Accounting Developments”.

Ability to Attract and Retain Our Key Personnel

We rely heavily on the expertise and leadership of our founders, Mr. Xu He, our chief executive officer, and Mr. Xiaoyang Zhuang, our chief financial officer to maintain our core competence. Under their leadership, we have been able to achieve rapid expansion and significant growth since our inception. As the volume and size of our investments increase, we expect to continue to invest significant resources in hiring and retaining a deep talent pool of investment professionals as well as other key personnel to identify, execute and management our investments. See “Business — Employees.” Our ability to continue our growth will depend on our ability to attract qualified personnel and retain our current staff. See “Risk Factors — Risks Related to Our Business and Industry — Recruiting and retaining professionals may be more difficult in the future, which could adversely affect our business, results of operations and financial condition.”

Fluctuations in Currency Exchange Rates

We have significant foreign currency exposure, and are primarily affected by fluctuations in exchange rates between the Renminbi and the U.S. dollar. While we typically raise capital denominated in Renminbi from China-based investors, the focus of our investments is primarily in U.S. China concepts stock. As such, our investments in the QDII plans are denominated in Renminbi, and the QDII’s investments in the targets are denominated in U.S. dollars. When we exit such investments, the QDII converts the proceeds back into Renminbi when repatriating such proceeds back to China. Furthermore, all of our revenue is denominated in Renminbi while our financial reporting is in U.S. dollars. Historically, we did not incur any material losses due to fluctuations in exchange rates. However, we cannot assure you that any future material fluctuations in exchange rates will not lead to significant currency exchange losses, thereby materially and adversely affecting our financial condition and results of operations.

Transition to Public Company Status

Subsequent to the completion of our initial public offering, our general and administrative expenses are expected to increase materially in connection with meeting our public company reporting obligations and corporate

 

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governance requirements. The increased expenses will include legal, accounting and other professional service fees, insurance premiums, auditing fees, investor relations, stockholder meetings, printing and filing fees, share-based compensation expense, as well as employee-related expenses for regulatory compliance and other costs. In addition, our selling and administrative expenses are also expected to increase as we add personnel and incur additional fees and costs related to the growth of our business and our operation as a publicly traded company in the United States. We are a relatively early-stage company with a limited operating history. As a result, our costs associated with being a public company are expected to be of a higher proportion of revenue and net profit as compared to a larger-scale and more mature company.

Key Components of Consolidated Statements of Income

Revenue

We generate revenue primarily from the provision of fund management services and financial advisory services. The following table sets forth a breakdown of our revenue for the periods indicated.

 

     For the Year Ended
March 31
     For the Year Ended
March 31,
     For the Three Months
Ended June 30,
 
     2017      %      2018      %      2018      %  

Fund management services

                 

Subscription fees

   $ 876,120        13.6%        2,917,427        22.9%        155,038        0.7%  

Management fees

     473,797        7.4%        4,418,873        34.6%        2,076,084        9.2%  

Realized carried interest

                   2,138,305        16.7%        546,863        2.4%  

Unrealized carried interest

     1,617,201        25.1%        2,580,508        20.2%        19,833,846        87.7%  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     2,967,118        46.1%        12,055,113        94.4%        22,611,831        100%  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial advisory services

     3,476,090        53.9%        711,428        5.6%                
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenue

   $ 6,443,208        100.0%        12,766,541        100%        22,611,831        100%  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fund Management Services

Revenue from fund management services, which accounted for 46.1%, 94.4% and 100% of our total revenue for the years ended March 31, 2017 and 2018 and the three months ended June 30, 2018, respectively, comprises subscription fees, management fees and carried interest, consisting of realized carried interest and unrealized carried interest. The following is a description of the components of our revenue from fund management services:

 

   

Subscription fees. We generally charge our clients a subscription fee based upon 1% of the relevant fund amount, where applicable. For the fiscal years ended March 31, 2017 and 2018 and for the three months ended June 30, 2017 and 2018, the weighted average of our subscription fee rate was 0.9%, 0.8%, 1.0%, and 1.0%, respectively. We expect our weighted average subscription fee rates to remain relatively stable in the foreseeable future. See “Business — Structure and Operation of Our Investment Funds — Fee Structure and Incentive Arrangements”. This is a one-off charge that we recognize as revenue when the relevant fund is successfully established and is typically paid on or shortly after the establishment of the fund.

 

   

Management fees. We generally charge a management fee of 1% to 2.5% of the relevant fund amount, where applicable. For the fiscal years ended March 31, 2017 and 2018 and the three months ended June 30, 2017 and 2018, the weighted average of our management fee rates was 1.0%, 1.6%, 1.8% and 1.8%, respectively. The increase in the weighted average management fee rates for the year ended March 31, 2018 was primarily because our Value Return fund category accounted for a significant

 

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portion of our funds for the year ended March 31, 2017 but we did not charge management fees for funds established under such fund category. We expect our weighted average management fee rates to remain relatively stable in the foreseeable future. See “Business — Structure and Operation of Our Investment Funds — Fee Structure and Incentive Arrangements”. Management fees are recognized proportionally during the term of the fund, which is generally one to three years. We receive the entire management fee in advance from the fund’s investors, which advancement is recorded as deferred revenue and amortized using the straight-line method throughout the operating period of the related fund.

 

   

Carried interest. Our funds generate gains from the underlying investments in our private equity funds. Carried interest is the back-end income generated from our funds. Carried interest entitles us to a percentage of a fund’s gains, effectively serving as a performance-based incentive, and is typically structured as a net profits interest in the applicable fund. To date, we have charged carried interest on a significant majority of our funds. In cases where carried interest is applicable, we generally charge our clients a carried interest rate of 20% to 60%. For most of our carry funds, our carried interest was subject to an annual preferred fund shareholder return. Where applicable, these preferred return rates generally range from 8% to 25% per annum. See “Business — Structure and Operation of Our Investment Funds — Fee Structure and Incentive Arrangements”. Under the accounting standards currently in effect, our unrealized carried interest is calculated based on the cumulative fund performance, which equals to the unrealized fair value gains as if the fair value of the underlying investment were realized as at the end of each reporting period. Fair value for the private companies in our investment portfolio has been determined by Valuelink and DIAL, which are independent valuation firms that we have engaged. Fair value for the public companies in our investment portfolio has been determined with reference to the closing stock prices at the end of a reporting period.

In the foreseeable future, we expect that (i) our subscription fees and management fees continue to increase in absolute amount as we plan to grow our AUM by raising more funds and diversifying our investment portfolio; (ii) our realized carried interest is likely to increase as a percentage of our total net revenues as we would exit 20 funds in 2019 at the end of their lifecycles, which have generated and are expected to generate positive returns and the adoption of the new accounting standards may cause our carried interest to consist of realized carried interest only beginning in fiscal year 2019; and (iii) our unrealized carried interest is expected to be affected by the adoption of the new accounting standards under the “Revenue from Contracts with Customers” beginning in fiscal year 2019. The amounts of unrealized carried interest that historically have been recognized at the end of each reporting period would expected to be recognized at the termination of the private equity funds under the new accounting standards. See “— Recent Accounting Developments”, and “Risk Factors — Risks Related to our Business and Industry — Your investment should take into account our adoption of new accounting standards beginning fiscal year 2019, as a result of which our period-to-period operating results may not be directly comparable.”

Financial Advisory Services

Revenue from financial advisory services accounted for 53.9%, 5.6%, 24.8% and nil of our revenue for the years ended March 31, 2017 and 2018 and the three months ended June 30, 2017 and 2018, respectively. Revenue from financial advisory services comprises financial advisory fees, which we charge investors for sourcing investment targets, conducting due diligence, structuring transactions, and facilitating negotiations. Financial advisory fees are recognized as services are rendered, over a period of time between six to 12 months. Our revenue from financial advisory fees accounted for 53.9% of our total revenue for the fiscal year ended March 31, 2017 as we focused on these services to gain access to potential investments. As we continue to develop our equity investment portfolio and strengthen our reputation in the industry, we expect to generate a lesser proportion of our revenue from financial advisory services and to focus on our fund management services going forward.

 

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Operating Costs and Expenses

Our operating costs and expenses primarily consist of distribution and servicing costs, carried interest related compensation, selling expenses, and general and administrative expenses. The following table sets forth the components of our operating costs and expenses for the periods indicated.

 

     For the Year Ended
March 31,
    For the Three Months
Ended June 30,
 
     2017      %     2018      %     2017      %     2018      %  

Distribution and servicing costs

   $ 1,726,014        61.1     4,592,080        50.4     535,135        47.8     1,557,237        17.2

Carried interest related compensation

     229,161        8.1     1,561,803        17.1     97,334        8.7     6,471,646        71.5

Selling expenses

     502,354        17.8     1,291,990        14.2     239,779        21.4     388,592        4.3

General and administrative expenses

     368,907        13.0     1,668,229        18.3     247,619        22.1     631,693        7.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total operating costs and expenses

   $ 2,826,436        100.0     9,114,102        100     1,119,867        100     9,049,168        100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following is a brief description of these components:

 

   

Distribution and servicing costs. Distribution and servicing costs primarily comprise: (i) fees that we pay to our joint fundraising partners in connection with the provision of our fund management services, including investor referrals and investor relationship maintenance fees; and (ii) costs to third parties for provision of financial advisory services in connection with the provision of our fund management services, including investor and investment target referrals and investor relationship maintenance costs. We expect our distribution and servicing costs continue to increase in absolute amount in line with the growth of our AUM.

 

   

Carried interest related compensation. Carried interest related compensation represents the performance fees paid to or recognized for, as applicable, our joint fundraising partners calculated based on the carried interest we receive or recognize. The recognition of the carried interest related compensation is expected to be affected by the adoption of the new accounting standards from April 1, 2019. If the recognition of unrealized carried interest is delayed, the recognition of the corresponding carried interest compensation would be delayed as well.

 

   

Selling expenses. Selling expenses consist primarily of salaries and benefits of our sales employees and service costs directly relating to funds sales and promotional activities. We expect our selling expenses to increase in the near future as we increase our sales and promotional efforts in line with the expansion of our business and fund offerings.

 

   

General and administrative expenses. General and administrative expenses consist primarily of salaries and benefits related to our management, accounting and finance, legal and human resources teams, as well as other operating expenses. We expect our general and administrative expenses to continue to increase in absolute terms as our business expands, as we hire additional personnel in line with such expansion. In addition, we expect to continue to hire new employees and engage legal, accounting and other professional service providers to meet our public company reporting and corporate governance requirements subsequent to this offering. See “— Key Factors Affecting Our Results of Operations —Transition to Public Company Status.”

 

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Investment Income

We generated investment income of nil, $208,480, $7,059 and $55,450 for the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2017 and 2018, respectively. Investment gains were primarily generated from:

 

   

available-for-sale investments, which represented financial products purchased from commercial banks. Available-for-sale investments are carried at their fair values and the unrealized gains or losses from the changes in fair values are reported net of tax in accumulated other comprehensive income until realized. When changes in fair values are realized, such as where financial products are redeemed, any gains (or losses) from the changes are recorded as investment income (or losses) in our consolidated statements of income;

 

   

net gains from our investments in funds under our management, which are not consolidated, partially offset by net losses from our investment interest in two domestic companies, namely, Guangzhou Alfat Private Equity Securities Investment Fund Management Co., Ltd. and Beijing Cornerstone Asset Management Co., Ltd. See Note 4 to our consolidated financial statements included herein; and

 

   

net gains from our investments in principal-protected financial products purchased from commercial banks.

Taxation

Our company, our subsidiaries, and our consolidated VIE file tax returns separately.

1) Value added tax (“VAT”)

Pursuant to the Provisional Regulation of the PRC on VAT and the related implementing rules, all entities and individuals (“taxpayers”) that are engaged in the modern service industry in the PRC are generally required to pay VAT at a rate of 6% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayers. Our PRC subsidiary and our consolidated VIE are subject to VAT at 6% of their revenues.

2) Income tax

British Virgin Islands (“BVI”)

Under the current laws of BVI, we are not subject to tax on income or capital gain. In addition, payments of dividends that we make to our shareholders are not subject to withholding tax in the BVI.

Hong Kong

CSC HK, which was incorporated in Hong Kong, is subject to a corporate income tax rate of 16.5%.

PRC

Our subsidiary and the consolidated VIE established in the PRC are subject to the PRC statutory income tax rate of 25%, according to the PRC Enterprise Income Tax (“EIT”) law.

The current PRC Enterprise Income Tax Law imposes a 10% withholding income tax for dividends distributed by foreign invested enterprises to their immediate holding companies outside the PRC. A lower withholding tax rate will be applied if there is a tax treaty arrangement between the PRC and the jurisdiction of the foreign holding company. Distributions to holding companies in Hong Kong that satisfy certain requirements specified by PRC tax authorities, for example, will be subject to a 5% withholding tax rate.

 

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Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these audited consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate our estimates on an ongoing basis, including those related to revenue recognition and income taxes. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the judgments we make about the carrying values of our assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.

The critical accounting policies summarized in this section are discussed in further detail in the notes to the audited consolidated financial statements appearing elsewhere in this prospectus. Management believes that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.

Basic of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

The consolidated financial statements include the financial statements of all our subsidiaries and our VIE. All transactions and balances between our company, our subsidiaries and our VIE have been eliminated upon consolidation.

In February 2015, the Financial Accounting Standards Board (“FASB”) issued amended consolidation guidance with the issuance of ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). We adopted this new guidance from the inception on August 3, 2015. The guidance in ASU 2015-02 eliminates the presumption that a general partner should consolidate a limited partnership and also changes the consolidation model specific to limited partnerships. The amendments also clarify how to evaluate fees paid to an asset manager or other entity that makes the decisions for the investment vehicle and whether such fees should be considered in determining when a VIE should be reported on an asset manager’s balance sheet. After evaluating the impact of the above guidance, we determined that no investment fund should be consolidated as of March 31, 2017 and 2018 and June 30, 2018.

Fair Value Measurement

We have applied ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands financial statement disclosure requirements for fair value measurements.

ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability.

 

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ASC Topic 820 specifies a hierarchy of valuation techniques, which is based on whether the inputs into the valuation technique are observable or unobservable. The hierarchy is as follows:

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments; and

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value. Unobservable inputs are valuation technique inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Management is responsible for determining the assets acquired, liabilities assumed and intangibles identified as of the acquisition date and considered a number of factors including valuations from independent appraiser.

When available, we use quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, we measure fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and currency rates.

Impairment of Long-lived Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we assess the recoverability of the long-lived assets by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition where the fair value is lower than the carrying value, measurement of an impairment loss is recognized in the consolidated statements of income and comprehensive income for the difference between the fair value, using the expected future discounted cash flows, and the carrying value of the assets. No impairment of long-lived assets was recognized for the periods presented.

Compensation Expense Related To Escrowed Shares

We plan to enter into a share escrow agreement in connection with this offering, which will cover 66,679,047 ordinary shares beneficially owned by certain of our directors, officers and employees and 67,242,928 ordinary shares held and beneficially owned by outside shareholders (the “Share Escrow Plan”). Under the Share Escrow Plan, all of the escrowed shares will be released if net income (excluding the impact of any compensation expense as a result of the implementation of the Share Escrow Plan) for any fiscal year during the three years ended March 31, 2021 meets a target of approximately $28.8 million in net income, provided that if such target is not met, the escrowed shares will be released based on actual net income achieved and conditions set forth in the share escrow agreement.

The placement of escrowed shares is viewed as a recapitalization similar to a reverse stock split. All per share amounts and shares outstanding for all the periods should be retroactively restated to reflect the changes in our capital structure.

Pursuant to FASB ASC 718, escrowed shares released to our directors, officers and employees as beneficial owners upon the achievement of certain criteria are considered to be a compensatory arrangement. Accordingly, the fair value of the shares at the time they are released from escrow should be based on the quoted closing stock price at the time of their release from escrow and recognized as a charge to income in that period. Therefore, a non-recurring, non-cash expense will be recognized.

Income Tax

We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for

 

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the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Revenue Recognition

Revenues primarily consist of subscription fees, management fees, financial advisory fees, and carried interest.

Subscription fees

Subscription fees are earned by us primarily at the beginning of the subscription period for most of the funds when applicable and are based upon 1% of capital committed. The subscription fee is a one-off charge and recognized as revenue when the investment funds are successfully established and typically paid on or shortly after the establishment of investment funds.

Management fees

Management fees are recognized in the period during which the related services are performed in accordance with the contractual terms of the fund agreements from the established date to the terminated date of the funds. Management fees earned from certain investment funds are based upon range up to 2% of capital committed. By unanimous consent among the fund manager, investors and the trustee, the fund could be terminated earlier than the contract period, and the remaining portion of unamortized management fee shall be returned to the investors.

According to the fund investment contract, shortly after the established date of the fund (approximately ten days), we receive all of the management fees in advance from the fund investors. The uncollected management fees will be reflected in management fees receivables in the consolidated balance sheets. The advancement is presented as deferred revenue in the consolidated balance sheets, which is amortized using the straight-line method throughout the operating period of the related fund. When the related fund is terminated early, the unamortized management fee would be reclassified to other payable and accrued liabilities.

Financial advisory fees

Financial advisory fees are earned by providing financial advisory service to third parties with respect to identifying suitable target investment projects that meet the specific investment needs of investors based on our expertise, market resources, internal database and professional relationships with industry peers. We charge our financial advisory clients financial advisory fees for sourcing investment targets, conducting due diligence, structuring transactions and facilitating negotiations between investors and target investment companies and recognized as the services are rendered, over a period of time according to the contracts.

Financial advisory fee receivables represent receivables from advisory clients whose service had been fully provided by us. Management reviews our receivable balances each reporting period to determine if an allowance for doubtful accounts is required. An allowance for doubtful accounts is recorded in the period in which loss is determined to be probable based on assessment of specific evidence indicating doubtful collection, historical experience, account balance aging and prevailing economic conditions. Bad debts are written off against the allowance after all collection efforts have ceased.

Carried interest

Carried interest is allocated to our company based on the cumulative fund performance to date, and where applicable, subject to preferred return to investors. At the end of each reporting period, we calculate the carried interest that would be due to us for each fund, pursuant to the fund agreements, as if the fair value of the

 

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underlying investment were realized as of such date, irrespective of whether such amounts have been realized. As the fair value of underlying investment varies between reporting periods, it is necessary to make adjustment to amounts recorded as carried interest to reflect either (a) positive performance resulting in an increase in the carried interest allocated to us or (b) negative performance that would cause the amounts due to us to be less than the amount previously recognized as revenue, resulting in a negative adjustment to carried interest allocated to the investors. In each case, it is necessary to calculate the carried interest on cumulative results compared to the carried interest recorded to date and make the required positive and negative adjustments. We cease to record negative carried interest allocations once previously recognized carried interest allocations for a fund have been fully reversed. We are not obligated to pay guaranteed returns, and therefore, cannot have negative carried interest over the life of a fund.

Accrued but un-collected carried interest as of the reporting date is reflected in carried interest receivable in the consolidated balance sheets. The balance of carried interest receivables will be adjusted pursuant to the unrealized carried interest recognized at the periods end. The receivable amount will be collected when the related fund is closed and the carried interest is realized.

Results of Operations

The following table sets forth a summary of our consolidated statements of income for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of operations in any period are not necessarily indicative of the results that may be expected for any future period.

 

     For the Year Ended March 31,      For the Three Months Ended
June 30,
 
     2017      2018      2017      2018  

Total revenue

   $ 6,443,208      $ 12,766,541      $ 2,777,863      $ 22,611,831  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expense

     2,826,436        9,114,102        1,119,867        9,049,168  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment income

            208,480        7,059        55,450  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes provision

     3,616,772        3,860,919        1,665,055        13,618,113  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income tax provisions

     909,783        975,182        422,447        3,409,296  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     2,706,989        2,885,737        1,242,608        10,208,817  
  

 

 

    

 

 

    

 

 

    

 

 

 

Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017

Revenue

Our total revenue was $22.6 million for the three months ended June 30, 2018, representing a significant increase of $19.8 million from $2.8 million for the three months ended June 30, 2017. The increase in total revenue was due to an increase in revenue generated from our fund management services, slightly offset by a decrease in financial advisory fees.

Our revenue generated from fund management services was $22.6 million for the three months ended June 30, 2018, representing a significant increase of $20.5 million from $2.1 million for the three months ended June 30, 2017. The increase was primarily due to:

 

   

an increase of $18.7 million in unrealized carried interest primarily due to (i) the establishment of 24 new funds with new AUM totaling $2.3 billion that completed investments for the year ended June 30, 2018; and (ii) the positive performance of a majority of our new funds during the three months ended June 30, 2018, particularly the ones invested in QDII plans such as East Value III series, Cornerstone East Value III fund, Cornerstone East Value V series and Cornerstone East Value VII series;

 

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an increase of $1.6 million in management fees as we recognized revenue from management fees for a greater number of funds during this period in accordance with our revenue recognition policy, partially offset by a decrease of $344,400 in subscription fees, from which we recognize revenue when the relevant funds are established, primarily because new funds established in the three months ended June 30, 2018 raised a total capital of approximately $16.1 million as compared with new funds established in the three months ended June 30, 2017, which raised a total capital of approximately $54.9 million; and

 

   

a recognition of realized carried interest of $546,863 as we dissolved and liquidated investments under East Value II series under the East Value fund category in the second quarter of 2018 upon the expiration of the term of the fund series.

Our revenue generated from financial advisory fees was $0.7 million for the three months ended June 30, 2017, and nil for the same period in 2018 as a result of our shift in focus from financial advisory services to fund management services.

Operating Costs and Expenses

Our total operating costs and expenses amounted to $9.0 million for the three months ended June 30, 2018, representing a significant increase of $7.9 million from $1.1 million for the three months ended June 30, 2017. The increase in total operating costs and expenses was primarily due to:

 

   

an increase of $148,813 in selling expenses to $388,592 for the three months ended June 30, 2018 from $239,779 for the three months ended June 30, 2017 as we allocated more resources to our fund sales and promotional activities to further develop our business and increase brand recognition;

 

   

an increase of $384,074 in general and administrative expenses to $631,693 for the three months ended June 30, 2018 from $247,619 for the three months ended June 30, 2017, which was primarily attributable to (i) fees incurred for professional parties in relation to this public offering; (ii) an increase in salaries and benefits of members of our management; and (iii) an increase in depreciation expenses;

 

   

an increase of $1.0 million in distribution and servicing costs to $1.6 million for the three months ended June 30, 2018 from $535,135 for the three months ended June 30, 2017, primarily because we recorded distribution and servicing costs for a greater number of funds during the three months ended June 30, 2018 in accordance with our policy for recognition of distribution and servicing costs; and

 

   

an increase of $6.4 million in carried interest related compensation to $6.5 million for the three months ended June 30, 2018 from $97,334 for the three months ended June 30, 2017, which was primarily due to an increase in carried interest reflecting the positive performance of our East Value III series, Cornerstone East Value III fund, Cornerstone East Value V series and Cornerstone East Value VII series during the three months ended June 30, 2018.

Investment income

We generated investment income of $55,450 for the three months ended June 30, 2018 from (i) net gains from our investments in funds under our management, which are not consolidated, partially offset by net losses from our investment interest in two domestic companies; and (ii) net gains from our investments in principal-protected financial products purchased from commercial banks, representing an increase of $48,391 from investment income of $7,059 from gains on the sale of available-for-sale investments for the three months ended June 30, 2017.

 

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Income tax

Our income tax expense was $3.4 million for the three months ended June 30, 2018, representing an increase of $3.0 million from $422,447 for the three months ended June 30, 2017. Our effective tax rate was 25.0% and 25.4% for the three months ended June 30, 2018 and 2017, respectively.

Net income

As a result of the foregoing, our net income was $10.2 million for the three months ended June 30, 2018, representing an increase of $9.0 million from our net income of $1.2 million for the three months ended June 30, 2017.

Year Ended March 31, 2018 Compared to Year Ended March 31, 2017

Revenue

Our total revenue was $12.8 million for the year ended March 31, 2018, representing an increase of $6.4 million from $6.4 million for the year ended March 31, 2017. We recorded a significant increase in total revenue primarily due to an increase in revenue generated from our fund management services for the year ended March 31, 2018.

Our revenue generated from fund management services was $12.1 million for the year ended March 31, 2018, a significant increase of $9.1 million from $3.0 million for the year ended March 31, 2017. The increase was primarily due to:

 

   

an increase of $2.0 million in subscription fees and an increase of $3.9 million in management fees, primarily because new funds established in the year ended March 31, 2018 raised a total capital of approximately $366.5 million whereas new funds established in the year ended March 31, 2017 raised a total capital of approximately $102.2 million;

 

   

the $2.1 million in realized carried interest from our East Value series under our East Value category of funds when we exited all of our investments under this fund series in October 2017; and

 

   

an increase of $1.0 million in unrealized carried interest reflecting the performance of our funds, particularly our East Value III series and Cornerstone East Value III fund.

Our revenue generated from financial advisory fees was $711,428 for the year ended March 31, 2018, representing a decrease of $2.8 million from $3.5 million for the year ended March 31, 2017. The decrease was primarily a result of our shift in focus from financial advisory services to fund management services.

Operating Costs and Expenses

Our total operating costs and expenses amounted to $9.1 million for the year ended March 31, 2018, an increase of $6.3 million from $2.8 million for the year ended March 31, 2017. The increase in total operating costs and expenses was primarily due to:

 

   

an increase of $2.9 million in distribution and servicing costs to $4.6 million for the year ended March 31, 2018 from $1.7 million for the year ended March 31, 2017, which was primarily due to (i) an increase in fees paid to joint fundraising partners as a result of new funds established; and (ii) fees paid to third party financial advisors for their services;

 

   

an increase of $0.8 million in selling expenses to $1.3 million for the year ended March 31, 2018 from $0.5 million for the year ended March 31, 2017, primarily due to (i) an increase in salaries and benefits

 

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of sales personnel; (ii) increased activities to support client relationship maintenance and (iii) allocation of more resources to our fund sales and promotional activities to develop our business and brand recognition;

 

   

an increase of $1.3 million in general and administrative expenses to $1.7 million for the year ended March 31, 2018 from $368,907 for the year ended March 31, 2017 due to (i) an increase in salaries and benefits of members of our management; (ii) fees incurred for professional parties in relation to this public offering; (iii) expenses relating to the lease and remodeling of our office headquarters in Guangzhou; and (iv) an increase in depreciation expenses; and

 

   

an increase of $1.3 million in carried interest related compensation to $1.6 million for the year ended March 31, 2018 from $229,161 for the year ended March 31, 2017, primarily due to an increase in carried interest reflecting the positive performance of our funds, particularly East Value III series and Cornerstone East Value III fund for the year ended March 31, 2018.

Investment income

We generated investment income of $208,480 for the year ended March 31, 2018 primarily from (i) investment gains from available-for-sale investments during this period; and (ii) net gains from our investments in funds under our management, which are not consolidated. We did not generate any investment income for the year ended March 31, 2017.

Income Tax

Our income tax expense was $975,182 for the year ended March 31, 2018, representing an increase of $65,399 from $909,783 for the year ended March 31, 2017. Our effective tax rate was 25.2% and 25.3% for the years ended March 31, 2017 and 2018, respectively.

Net Income (loss)

As a result of the foregoing, our net income was $2.7 million and $2.9 million for the years ended March 31, 2017 and 2018, respectively.

Liquidity and Capital Resources

To date, we have financed our operations primarily through cash generated from our business operations and capital injections by our shareholders. We received an aggregated capital injection by our shareholders of $527,692 for the year ended March 31, 2018. We plan to finance our future operations primarily from cash generated from our operations, proceeds from this offering and cash on hand. As of June 30, 2018, March 31, 2018 and March 31, 2017, we had $5.1 million, $5.7 million, and $2.4 million, respectively, in cash and cash equivalents. Approximately 97.0% of our cash and cash equivalent as of June 30, 2018 was held in China, substantially all of which was held by our VIE and its subsidiary and denominated in Renminbi. As of June 30, 2018, March 31, 2018 and March 31, 2017, our working capital amounted to $10.7 million, $2.7 million and $1.9 million, respectively. As of June 30, 2018, we did not have any outstanding bank loans. As of the same date, we recorded other receivable from third parties of $321,780, which comprised unsecured and non-interest loans to a third party.

In light of our total cash and cash equivalents, the cash inflows from operating activities, and the capital injections by our shareholders for the year ended March 31, 2018, we did not experience any material impact on our liquidity, capital resources and results of operations as a result of such loans and deposit. We believe that our current cash, cash flows provided by operating activities and the estimated net proceeds from this offering will be

 

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sufficient to meet our working capital needs in the next 12 months following this offering. We may, however, need additional capital in the future to fund our continued operations. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional equity or convertible loans would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that might restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

Although we consolidate the results of our consolidated variable interest entity, we only have access to cash balances or future earnings of our consolidated variable interest entity through our contractual arrangements with our variable interest entity. See “Corporate History and Structure”. For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “— Holding Company Structure” below.

As a British Virgin Islands exempted and offshore holding company, we are permitted under PRC laws and regulations to provide funding to our wholly foreign-owned subsidiary in China only through loans or capital contributions, subject to the approval of government authorities and limits on the amount of capital contributions and loans. In addition, our wholly foreign-owned subsidiary in China may provide Renminbi funding to our consolidated VIE only through entrusted loans. See “Risk Factors — Risks Related to Doing Business in China — PRC regulation of loans and direct investments by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

Cash Flows

The following table summarizes our cash flows for the period indicated.

 

     For the Year Ended March 31,     For the Three Months Ended
June 30,
 
     2017     2018     2017     2018  

Net cash provided by (used in) operating activities

     2,740,172       4,049,540       (124,293     253,141  

Net cash provided by (used in) investing activities

     (282,696     (1,656,227     (2,089,595     (792,039

Net cash provided by financing activities

     (65,617     520,980       377,144       209,000  

Effect of exchange rate change on cash and cash equivalents

     (59,989     370,374       6,031       (260,697

Cash and cash equivalents, beginning balance

     62,825       2,394,695       2,394,695       5,679,362  

Cash and cash equivalents, ending balance

     2,394,695       5,679,362       563,982       5,088,767  

Net cash provided by (used in) operating activities

Net cash provided by operating activities amounted to $253,141 for the three months ended June 30, 2018. This reflected a net income of $10.2 million, as adjusted for non-cash items primarily including (i) the unrealized carried interest of $19.8 million; (ii) carried interest related compensation of $6.5 million; and (iii) net deferred income tax of $2.8 million, and the effect of changes in working capital including: (i) a decrease of $848,205 in prepayment to service providers, namely, our joint fundraising partners, primarily due to amortization of prepaid distribution and servicing costs; and (ii) a decrease in prepaid expenses and other assets in the amount of $801,580, primarily due to repayment of a large portion of unsecured interest-free loans made to a third party, partially offset by a decrease in deferred revenue of $1.4 million as a result of an increase in management fees we recognized during this period in accordance with our revenue recognition policy.

 

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Net cash provided by operating activities amounted to $4.0 million for the year ended March 31, 2018. This reflected a net income of $2.9 million, as adjusted for non-cash items primarily including (i) the unrealized carried interest of $2.6 million; (ii) income taxes payable of $1.3 million; and (iii) carried interest related compensation of $1.1 million, and the effect of changes in working capital including an increase of deferred revenue in the amount of $9.8 million as a result of increased management fees received in advance for the period, partially offset by (i) an increase of $7.1 million in prepayments to service providers, namely, our joint fundraising partners, reflecting increases in new funds established and value of capital raised; and (ii) an increase in prepaid expenses and other assets of $1.2 million due to unsecured and non-interest loans to a third party.

Net cash provided by operating activities amounted to $2.7 million for the year ended March 31, 2017. This reflected the net income of $2.7 million, adjusted by the unrealized carried interest of $1.6 million and the effect of changes in working capital including: (i) an increase in deferred revenue in the amount of $2.3 million due to the increased amount of management fees received during the period; (ii) an increase in other payables and accrued liabilities in the amount $294,157 primarily due to an accrued expense for remodeling of our office headquarters and an increase in VAT payable primarily as a result of the significant increase in revenue; partially offset by: (i) an increase of $1.2 million in prepayment to service providers, i.e. joint fundraising partners, reflecting increases in new funds and amount of AUM raised; (ii) an increase in prepaid expenses and other assets in the amount of $0.7 million primarily related to (x) a deposit in a potential investment which we later decided to forego and (y) lease deposits for our office headquarters; and (iii) an increase in financial advisory fee receivables in the amount of $425,007 due to an increase in business volume for these services.

Investing activities

Net cash used in investing activities was $792,039 for the three months ended June 30, 2018, which was primarily attributable to (i) our investment in Beijing Cornerstone; and (ii) purchase of office equipment.

Net cash used in investing activities was $1.7 million for the year ended March 31, 2018, which was primarily attributable to (i) our investments of $1.2 million in funds under our management, which are not consolidated; and (ii) purchase of office equipment and vehicles.

Net cash used in investing activities was $282,696 for the year ended March 31, 2017, which was primarily attributable to our expenditure for remodeling of our office headquarters and purchase of computers and other office equipment.

Financing activities

Net cash provided by financing activities amounted to $209,000 for the three months ended June 30, 2018, which was attributable to proceeds from a shareholder’s capital injection of $209,000.

Net cash provided by financing activities amounted to $520,980 for the year ended March 31, 2018, which was attributable to (i) proceeds from our related parties of $945,222 primarily for our daily operation. See “Related Party Transactions — Other Transactions with Related Parties”; and (ii) proceeds from a shareholder’s capital injection of $527,692, partially offset by proceeds to our related parties of $967,016.

Net cash used in financing activities amounted to $65,617 for the year ended March 31, 2017, which was attributable to the repayments to our related parties of $940,320, partially offset by proceeds from our related parties of $874,703.

Capital Expenditures

Our capital expenditures were $282,696, $910,883 and $180,409 for the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2018, which were primarily related to purchases of office equipment and vehicles as well as the remodeling of our office headquarters.

 

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Contractual Obligations and Commitments

We lease the office space for our Guangzhou headquarters under an irrevocable operating lease agreement. Lease expense for the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2018 was $227,307, $522,054 and $134,211, respectively.

The following table sets forth our minimum future commitments under non-cancelable operating lease agreements as of June 30, 2018:

 

     Lease
Commitment
 

Years ending March 31,

  

Remaining in 2019

   $ 388,898  

2020

     518,155  

2021

     517,028  

2022

     344,685  

2023

      
  

 

 

 

Total

   $ 1,768,766  
  

 

 

 

We did not have any significant capital and other commitments, long-term obligations, or guarantees as of March 31, 2017 and 2018, respectively.

Holding Company Structure

Cornerstone Management, Inc. is a holding company with no material operations of its own. We conduct our operations primarily through our wholly owned subsidiary, our consolidated VIE and their subsidiaries in China. As a result, our ability to pay dividends depends upon dividends paid by our wholly owned subsidiary. If our wholly owned subsidiary or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly owned subsidiary in China is permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our wholly owned subsidiary and our consolidated VIE in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve funds reach 50% of its registered capital. In addition, our wholly foreign-owned subsidiary in China may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and our VIE may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. Although the statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of the respective companies, the reserve funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by the SAFE. We currently plan to reinvest all earnings from our wholly owned subsidiary in China to its business development and do not plan to request dividend distributions from such subsidiary.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Internal Control over Financial Reporting

Prior to this offering, we have been a private company with limited accounting personnel and other resources to address our internal control over financial reporting. In connection with the preparation and external audit of our

 

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consolidated financial statements, we and our independent registered public accounting firm identified one material weakness and certain other control deficiencies in our internal control over financial reporting as of June 30, 2018. The material weakness identified was the lack of dedicated resources to take responsibility for the finance and accounting functions and the preparation of financial statements in compliance with U.S. GAAP. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control under the Sarbanes-Oxley Act for purposes of identifying and reporting any weakness or significant deficiency in our internal control over financial reporting, as they may be required to do once we become a public company and our independent registered public accounting firm may be required to do once we cease to be an emerging growth company. Had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies may have been identified.

In order to improve our internal control over financial reporting, we have taken steps and will continue to implement measures to remediate the material weakness identified. For example, we have engaged a qualified financial and accounting advisory team and relevant staff with working experience of U.S. GAAP and SEC reporting requirements to strengthen the financial reporting function and set up a financial and system control framework. We have also established clear roles and responsibilities for accounting and financial reporting staff to address complex accounting and financial reporting issues. Furthermore, we continue to further expedite and streamline our reporting process and develop our compliance process, including by establishing a comprehensive policy and procedure manual to allow for the early detection, prevention and resolution of potential compliance issues, and establishing an ongoing program to provide sufficient and appropriate training for financial reporting and accounting personnel, especially training related to U.S. GAAP and SEC reporting requirements. We intend to conduct regular and continuous U.S. GAAP accounting and financial reporting programs and send our financial staff to attend external U.S. GAAP training courses. We expect that we will incur significant costs in the implementation of such measures. However, the implementation of these measures may not fully address the deficiencies in our internal control over financial reporting. We are not able to estimate with reasonable certainty the costs that we will need to incur to implement these and other measures designed to improve our internal control over financial reporting. The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. See “Risk Factors — Risks Related to Our Business and Industry — If we fail to implement and maintain effective internal control over financial reporting, our ability to accurately report our financial results may be impaired, which could adversely impact investor confidence and the market price of our ordinary shares.”

As a company with less than $1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting.

Quantitative and Qualitative Disclosure about Market Risk

Foreign Exchange Risk

Foreign currency risk arises from future commercial transactions and recognized assets and liabilities. A significant portion of our revenue-generating transactions and expense-related transactions are denominated in Renminbi, which is the functional currency of our subsidiaries, VIEs and their subsidiaries in China. We do not hedge against currency risk.

The change in value of the Renminbi against the U.S. dollar and other currencies is affected by various factors such as changes in political and economic conditions in the PRC. On July 21, 2005, the PRC government

 

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changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of Renminbi against the U.S. dollar would reduce the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares, servicing our outstanding debt, or for other business purposes, appreciation of the U.S. dollar against the Renminbi would reduce the U.S. dollar amounts available to us.

As of June 30, 2018, we had Renminbi-denominated cash and cash equivalents of RMB32.7 million (equivalent to approximately $4.9 million). A 10% depreciation of the Renminbi against the U.S. dollar based on the foreign exchange rate on June 30, 2018 would result in a decrease of $0.5 million in cash and cash equivalents.

Interest Rate Risk

Our exposure to interest rate risk primarily relates to the interest income generated by our excess cash, which is mostly held in interest-bearing bank deposits. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure. However, our future interest income may fall short of expectations due to changes in market interest rates.

Inflation Risk

To date, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2014, 2015, 2016 and 2017 were increases of 1.5%, 1.6%, 2.1% and 2.2%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.

Recent Accounting Developments

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which was subsequently modified in August 2015 by ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date. The core principle of ASU No. 2014-09 is that companies should recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects what the company expects to receive. It requires additional disclosures to describe the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers. In 2016, the FASB issued additional ASUs that clarify the implementation guidance on principal versus agent considerations (ASU 2016-08), on identifying performance obligations and licensing (ASU 2016-10), and on narrow-scope improvements and practical expedients (ASU 2016-12) as well as on the revenue recognition criteria and other technical corrections (ASU 2016-20). These new standards will identify performance obligations and narrow aspects on achieving core principle. The Company is currently evaluating the impact the adoption of this guidance may have on its financial statements, including with respect to the timing of the recognition of carried interest. The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Under the JOBS Act, emerging growth companies (“EGCs”) can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. Therefore, the Company will not be subject to the same new or revised accounting standards as public companies that are not EGCs. The

 

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Company anticipates adopting this new guidance on April 1, 2019 and will apply a prospective applications and comparative information will not be restated and continues to be reported under the accounting standards in effect for the period presented.

The adoption of the new revenue standard is expected to affect the Company’s consolidated financial statements primarily in the following aspects: for unrealized carried interest income, the amended guidance delays the recognition of revenues compared to the prior accounting treatment. These amounts were previously recognized at the end of each reporting period. Under the amended guidance, these amounts would be expected to be recognized at the termination of the private equity funds.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires that equity investments, except for those accounted for under the equity method or those that result in consolidation of the investee, be measured at fair value, with subsequent changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. It also impacts the presentation and disclosure requirements for financial instruments. It is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted only for certain provisions. The Company is in the process of evaluating the impact of adoption of this guidance on the Company’s consolidated financial statements and will adopt this guidance since April 1, 2019 since we are an EGC.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. For public business entities, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the guidance is permitted. In transition, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU No. 2018-10 and No. 2018-11, Leases (ASC 842). ASU 2018-10 provides narrow amendments that clarify how to apply certain aspects of the guidance in ASU 2016-02. ASU 2018-11 provides entities with an option of an additional transition method, by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. It also provides lessors an option to not separate lease and non-lease components when certain criteria are met. The Company is in the process of evaluating the impact that this guidance will have on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016 15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to provide guidance on the presentation and classification of certain cash receipts and cash payments on the statement of cash flows. The guidance specifically addresses cash flow issues with the objective of reducing the diversity in practice. The guidance will be effective for the Company in fiscal year 2018, but early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.

Other accounting pronouncements that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

 

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INDUSTRY

CHINA’S PRIVATE WEALTH

Overview

China has become one of the fastest growing nations in the world in terms of total private wealth. At approximately $29 trillion in 2017, China’s total private wealth, as measured by household wealth comprising financial and non-financial assets net of debts, was the largest in Asia, and the second largest in the world according to the CIC Report. The CIC Report identifies the following factors as the key growth drivers for China’s private wealth:

 

   

Continued economic growth. As the fastest growing major economy in the world, China’s real GDP grew at a CAGR of 7.1% from RMB56.5 trillion ($8.5 trillion) in 2012 to RMB79.6 trillion ($12.0 trillion) in 2017, and its GDP per capita increased at a CAGR of 7.9% from RMB39,954 ($6,005) in 2012 to RMB58,333 ($8,768) in 2017.

 

   

Continued urbanization and growth in average per capita income. China’s urbanization rate (which represents the percentage of urban population of the total over a certain period) increased steadily from 52% as of 2012 to 58% as of 2017 and is projected to reach 63% by 2022, according to the Department of Economic and Social Affairs of the United Nations. The country’s rapid economic and urban growth over the past few decades have also been drivers for the continued growth in the annual urban per capita disposable income, which saw a significant rise from RMB24,565 ($3,692) in 2012 to RMB36,305 ($5,457) in 2017, representing a CAGR of 8.1%, according to the National Bureau of Statistics of China.

 

   

Appreciation in asset value. China has experienced rapid and significant appreciation in value of assets held by households, mainly consisting of real property, which has contributed to the rapid growth in China’s private wealth. Historically, given the limited investment options in China and the steady growth in property value over the past few years, investors favored real estate as an investment choice. According to the CIC Report, real estate investments accounted for approximately 60% of total personal wealth in China in 2016. In particular, the average housing price in China’s 100 largest cities increased from RMB9,696 ($1,457) per square meter in January 2012 to reach RMB13,967 ($2,099) per square meter in December 2017, equivalent to an annual growth rate of 7.6%, according to the CIC Report.

According to the CIC Report, with the largest household wealth in Asia and the second largest household wealth in the world in 2017, China’s private wealth is expected to continue on an upward growth trend.

China’s High Income Population

High income individuals are defined by the CIC Report as those earning an annual salary of RMB500,000 (approximately $75,000) and above. According to the CIC Report, China’s high income population was approximately 6.7 million in 2017, having grown at an annual growth rate of between 7% and 10% over the past few years. Based on CIC’s estimates, high income population in China is expected to continue to grow by a rate between 5% and 8% in the next few years to come.

Despite the rise in China’s private wealth, the country’s private wealth management services industry is still at a relatively early stage of development compared to more developed markets such as the United States, and is characterized by low market penetration, a fragmented market and strong growth potential according to the CIC Report. Continued developments in the economic environment in China over the years and the rise of China’s private wealth have led a greater number of private investors in China, an increasing number of whom are high

 

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income investors possessing multiple years of investment experience based on CIC’s estimates, to seek investments that are more tailored to their individual needs, and this has propelled the growth of financial services such as alternative asset management services, including private equity fund management services. According to the CIC Report, such services, which focus on investment outcomes and specialization, have become increasingly attractive to investors in China seeking customized investment options and asset diversification. China’s private equity industry has therefore experienced significant growth over the years.

PRIVATE EQUITY IN CHINA

Overview

Private equity firms are a form of alternative asset managers that utilize a variety of investment strategies to achieve return objectives within certain predefined risk parameters and investment guidelines. Private equity fund managers generally adopt investment models that are client-centric rather than product-centric, taking into account the investment needs and preferences of individual clients based on their financial condition and risk profiles. According to the CIC Report, many firms in China adopt the traditional private equity business model by which investors commit capital to a fund on a blind-pool basis and thereafter depend on the fund’s investment team to identify investment opportunities, while other firms adopt an alternative model whereby they identify investment targets first, then raise capital on a deal-by-deal basis. Generally investing in non-public equity, preferred stock or distressed debt securities, PIPE transactions or in the going-private transactions of then-public companies, private equity fund managers in China typically earn management fees on committed or contributed capital, and carried interest based on the net profits of the fund, according to the CIC Report. Carried interest is generally subject to a preferred return for investors and a contingent repayment if actual realized performance of the fund at the time of liquidation does not meet the specified requirements. China’s private equity industry has experienced significant growth over the years, with an increase in AUM of more than RMB8.5 trillion ($1.3 trillion) from 2015 to 2017 by private equity funds in China, which grew in number from 8,846 in 2015 to 66,418 in 2017. According to the CIC Report, following tightened governance over private equity firms and heightened qualification requirements implemented by the AMAC in 2016 in an effort to raise industry standards, China saw a sharp decline in number of private equity firms registered with the AMAC, when more than 9,000 private equity firms lost their qualifications between March and July of 2016; however, the decline in number of private equity firms did not slow the growth in total AUM by private equity firms in China. As of December 2017, the country’s total AUM by private equity firms reached RMB11.1 trillion ($1.7 trillion). The following chart illustrates the overall growth in capital invested in private equity funds in China for the periods indicated:

 

LOGO

 

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Note: A sudden drop in September 2016 was due to a change in statistical parameters. The China Security Regulatory Commission changed its formula for calculating AUM of funds from committed capital to paid-in capital.

Source: AMAC, CSRC, CIC

In recent years, private equity funds in China have allocated an increasing amount of capital to foreign markets as a result of the growing interest among private China-based investors, including high income individuals, in overseas investments. Participation in overseas investments continued to grow with the total offshore investments increasing from RMB2 billion ($0.3 billion) in 2014 to RMB98.6 billion ($14.8 billion) in 2016. This translates into a growth in the proportion from 0.5% to 3.5% of the total investments over the same period by private equity funds in China. According to the CIC Report, factors contributing to this trend include the following:

 

   

Cooling Property Markets. Driven by rapid economic growth and increasing urbanization, property prices in China soared over the past decade, particularly in the country’s major cities. This led to a continued rise in housing prices, which heightened the appeal of real estate investment for many years. Since 2016, however, the PRC government has implemented various nationwide policies to tighten lending and restrict housing purchases, with a view to curbing speculation. As China’s property market is heavily influenced by government policies, these measures quickly resulted in a significant slowdown in growth of housing prices. Amid this weakened market sentiment, China’s investors began to invest their wealth in other products.

 

   

Low Cash Yields. The People’s Bank of China (“PBOC”) relaxed its monetary policy in order to stimulate consumption and the economy. In line with the decline in the one-year deposit rate set by the PBOC from 3.5% in 2012 to 1.5% in 2017, deposit rates at commercial banks in China have in general fallen in the past few years, thus making cash yields less attractive than they used to be.

 

   

China’s stock markets characterized by higher risks and volatility. China’s stock markets experienced relatively low levels of activity from 2012 to 2014 and then experienced robust activity from June 2014 to June 2015, with the Shanghai Composite Index surging by almost 150% and peaking at 5,166 on June 12, 2015, and the Shenzhen Component Index surging by 220%, and reaching 16,100 in the same month. With the burst of the stock market bubble in June 2015, China’s stock markets crashed and lost over 30% of their stock value within a single month. In response, the PRC government implemented measures to restrict short selling and to regulate stock purchases to stabilize the markets and, as a result, China’s stock markets began to recover in early 2016. For the five-year period from 2012 to 2017, the Shanghai Stock Exchange Composite Index and the Shenzhen Stock Exchange Component Index realized annual returns of 7.8% and 3.9%, respectively, far below the S&P 500’s 13.4% and DJIA’s 13.5% over the same period.

Factors such as the foregoing have spurred growing interest among China-based investors in investing their capital overseas, including in the U.S. capital markets. Moreover, with China experiencing a rapid rise in its private wealth, many high income individuals, together with institutional investors, are increasingly seeking to make offshore investments for currency hedge purposes. However, China continues to restrict currency exchange and curb outbound capital under stringent measures implemented by its foreign exchange regulator, the State Administration of Foreign Exchange (“SAFE”), significantly limiting the options for Chinese investors to tap into overseas markets. One of the few channels that enables capital outflow is the QDII program, which is discussed below.

The Qualified Domestic Institutional Investor Program

Approved by the State Council of the PRC in 2006 and implemented by SAFE, the Qualified Domestic Institutional Investor (“QDII”) program is an overseas investment program that allows certain qualified domestic

 

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entities to invest in securities outside of China. There are five types of QDIIs, namely, insurance companies, banks, trusts, securities companies and fund managers, each of which is governed by a different regulatory authority. For example, the CSRC supervises fund managers and securities companies, the China Banking Regulatory Commission (“CBRC”) oversees banks and trusts, and the China Insurance Regulatory Commission (“CIRC”) oversees insurance companies wishing to qualify as QDIIs. The CSRC is the principal regulator of fund managers who seek QDII qualification.

Accreditation of QDII and application for QDII quota

 

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Source:

CIC

QDIIs must be licensed by their respective competent regulators and granted a foreign exchange quota by SAFE before they can invest in foreign securities. The foreign exchange quota granted to a QDII can be recycled, i.e., when a QDII exits an overseas investment, the amount of quota allocated to such investment can be used by the QDII for other overseas investment plans under its management. To comply with PRC laws, fund managers, such as private equity firms, operating in China who do not qualify as a QDII will typically structure their overseas investment by investing proceeds from their private equity funds into investment plans (in the form of assets management plans, trust plans or other types of plans) established by approved QDIIs in China, or QDII plans, which would then invest in the target investments. Under such an arrangement, the QDII is entitled to receive asset management fees, the amount of which is negotiable and generally falls within the range of 1% to 4% of the total AUM of the plan. The QDII issues a separate investment plan, to which the private equity fund subscribes. By agreement, the private equity firm will often present highly detailed investment proposals to the QDIIs specifying their investment preferences with respect to investment scope and investment targets. The private equity firm also actively assists on various aspects of investment analysis and execution, including market research, identifying target portfolio companies, performing due diligence on the markets and industries, negotiating investment terms, advising on investment strategies and risk management procedures. However, the QDIIs could disagree with the investment proposals and decide not to invest in investment targets proposed by the private equity firm. According to the CIC Report, because the QDII program is directly monitored by SAFE and competition for QDII plans issued by licensed QDIIs is intense, approved QDIIs are generally selective of private equity firms with which they collaborate to execute their investment plans. When evaluating and choosing such private equity firms, QDIIs typically consider factors such as track record, market reputation, capital resources, investor base and management team. The following diagram illustrates the steps by which a private equity fund makes overseas investments through QDII plans.

 

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Process of private equity fund making overseas investments through QDII plans

 

 

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Source:

CIC

The QDII quota was set at $18.1 billion in September 2006, when the QDII program was first launched. It has since been expanded several times and by the end of 2017, a total of $90.0 billion had been approved under the QDII program and allocated among securities companies, fund managers, trusts, banks, and insurance companies. In April 2018, following SAFE’s announcement that it would continue to steadily reform and push forward the implementation of the QDII program, the total QDII quota was raised to $98.3 billion according to the CIC Report. The announcement is indicative of the PRC government’s overall supportive attitude towards the continued development of the QDII program, according to the same source. Notwithstanding, as the convertibility of the Renminbi into foreign currencies and the remittance of currency out of China are strictly controlled by the PRC Government, there can be no assurance that SAFE will not in future place restraints on the number and amount of outbound investments by reducing the total permitted QDII quota. See “Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may limit our ability to use our revenues effectively and the ability of our PRC subsidiary to obtain financing.”

According to the CIC Report, several factors continue to make overseas investment through the QDII program an attractive investment avenue for China-based investors, including:

 

   

Opportunities to gain from currency upside risk. As the Chinese yuan is not fully convertible, the QDII program provides China-based investors with a legitimate channel to convert large amounts of Chinese yuan into foreign currencies to invest in securities outside China. These investors would gain from the currency upside risk of depreciation in the Chinese yuan should such depreciation against foreign currencies materialize.

 

   

Opportunities to allocate investment risks. By permitting offshore investments, the program provides an alternative investment channel for China’s private wealth, which totaled $29 trillion in 2017 according to the CIC Report. By allocating part of their wealth into overseas markets, Chinese investors may be able to effectively reduce the overall investment risk they bear as a result of more geographically diversified portfolios.

 

   

Access to more sophisticated and mature markets. The program allows investors to tap into more sophisticated and mature foreign markets that offer greater stability and a broader range of publicly

 

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listed companies for a more diversified investment portfolio compared to the stock markets in China. Moreover, whereas the stock markets in China are closely monitored and controlled by the CSRC, the performance of overseas capital markets such as the U.S. and other major markets are more market-driven.

U.S. China Concepts Stocks

U.S. China concepts stocks refer to the U.S.-listed securities of China-based companies whose business operations are mainly located in, and revenues are primarily derived from, mainland China. A number of U.S. China concepts stocks are high-quality, high-growth companies that have chosen to list their securities in the United States to tap into foreign investor capital. As of January 2018, there were a total of 141 U.S. China concepts stocks listed on The Nasdaq Stock Market, The New York Stock Exchange, and The American Stock Exchange, with $1.0 trillion in total market capitalization. Of these, approximately 24% are companies operating in the TMT and other new economy sectors. According to the CIC Report, in its most recent national development plans, the PRC government has taken a number of measures to support the growth of technology and innovation, entrepreneurship and environmental protection, among other areas. For instance, policies aimed at expanding corporate financing channels and relaxing tax burdens for companies in the TMT sector and other emerging high-tech start-up companies have driven the significant development of TMT and innovative enterprises in China, such as media application and e-commerce platforms. From 2014 onwards, the total amount of investments made by private equity and venture capital funds in the TMT sector increased significantly to reach $20.1 billion in the second quarter of 2016 on a quarterly basis. Moreover, the first half of 2017 saw a total of $30.8 billion invested into TMT sectors in China. Meanwhile, the PRC government has favored research and development of new technologies such as AI and robotics, promoting the wide application of these and other new and advanced technologies in the daily lives of the people through the use of everyday objects and products such as smart home devices, automobiles and healthcare products, among others. In addition, the PRC government’s strong emphasis on environmental protection, which has facilitated increased investments in green technologies such as solar, electric vehicles and recyclable technologies, has led to the significant and continued development of these sectors as well as a growing emergence of start-ups in these and related industries.

By category, U.S. China concepts stocks have delivered outstanding returns compared to other stocks listed in the United States. The following chart sets forth the annualized returns of different stock market indices as of December 2017.

Annualized returns of different stock market indices, as of December 2017

 

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Source:

NASDAQ, Yahoo Finance, CIC

While each of the S&P 500 Index (“S&P 500”), the Dow Jones Industrial Average (“DJIA”) and the NASDAQ Golden Dragon China Index experienced a dramatic increase in the year leading up to December 2017, the

 

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NASDAQ Golden Dragon China Index, which is a modified market capitalization weighted index comprising U.S.-listed China concepts stocks, increased the most at 59.8% during this one-year period, surpassing the performance of the S&P 500 by 40.4% and the DJIA by 34.7%. According to the CIC Report, the robust growth of the NASDAQ Golden Dragon China Index in 2017 reflects the strong performance of U.S. China concepts stocks, particularly of companies in the TMT sector, despite concerns over China’s slowing economy in recent years. The CIC Report has identified the following as some of the principal factors that have fostered strong interest among China-based investors in U.S. China concepts stocks over the years.

 

   

U.S. markets more sophisticated and developed. The U.S. markets are among the most developed in the world with a sophisticated institutional investor base. According to the CIC Report, U.S. markets have a higher percentage of sophisticated, professional investors, resulting in more efficient stock markets.

 

   

Higher probability of successful IPO. As a listing venue, the United States has less stringent listing standards, particularly with respect to initial financial listing requirements, as well as a more simple listing application process compared to China. Given the higher likelihood of a successful IPO, investors have more confidence investing in the pre-IPO stage of companies seeking an IPO in the United States. In particular, the United States has been a popular listing venue for a number of high-growth China-based companies with which Chinese investors are familiar, further enhancing the appeal of the U.S. capital markets to China-based investors.

 

   

Greater potential for higher returns. Historically, the U.S. stock markets have offered more stable and better returns than China’s stock markets both in the short and long term. For example, the price returns of the S&P 500 and the DJIA have consistently surpassed those of the Shanghai Composite Index and Shenzhen Component Index on one-, two- and five-year bases.

As China’s economy continues its stable growth momentum, we believe U.S. China concepts stocks will continue to maintain their upward trajectory for the few years. Moreover, we believe that private equity firms that are able to provide investors in China with a channel to purchase U.S. equity securities, such as through the QDII funds, will have significant opportunities to capitalize on their access to the U.S. capital markets and gain a competitive advantage over other asset managers in China who do not have such capabilities.

Competition

Entry Barriers and Challenges

According to the CIC Report, the following are key entry barriers and challenges faced by private equity funds in China looking to conduct outbound investments:

 

   

Access to QDII program. A private equity fund without the QDII licence looking to invest in overseas markets must be able to invest into QDII plans by negotiating and partnering with a licensed QDII in order to gain access to overseas investments through the QDII program. Because the QDII program is directly monitored by SAFE and competition for QDII plans issued by licensed QDII is intense, approved QDIIs are generally selective of private equity firms with which they collaborate to execute their investment plans.

 

   

An established track record. A private equity firm must be able to present an investment track record to gain the confidence of potential investors. Investors require considerable deliberation before making such a decision and this requires a good investment track record. New entrants to the market that do not have an established record would encounter difficulties securing capital from investors to carry out their business.

 

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Regulatory Requirements. The regulatory environment for private equity funds has become increasingly stringent in recent years. For example, private equity funds had historically been under limited monitoring and oversight by regulators until 2014, when the Asset Management Association of China (the “AMAC”) required all fund managers and private equity funds to be registered with the AMAC. A successful registration requires a manager and its private equity fund to meet certain criteria, including qualifications of its management team, requirements on its registered capital and the amount of paid-in capital (which should be no less than 25% of the committed capital), appropriate work settings, facilities and systems, and internal control policies.

Key Success Factors

According to the CIC Report, the following are key factors contributing to the success of private equity funds in China that invest in overseas markets:

 

   

Fundraising capabilities. It is important for a private equity fund to have strong capital raising capabilities to enable it to make quality investments. The ability to raise sufficient capital and to raise it quickly whenever a fund manager has identified a target company with strong potential for high returns on investment would enable a fund manager to secure good investment opportunities and build a strong portfolio of assets.

 

   

Knowledge and understanding of overseas markets. According to the CIC Report, despite major developments in China’s capital markets providing a greater variety of investment and financing options in recent years, including debt and equity financings, the available options for domestic investments are unable to service the needs of a rapidly growing private wealth population. As China-based investors look increasingly to diversify their investment portfolios and risk allocation by purchasing more overseas assets, private equity funds that possess channels for outbound investments will be afforded significant opportunities. Moreover, in order to invest offshore successfully, fund managers must possess a sound understanding of and experience with the investment environment in overseas markets.

 

   

Strong management capabilities. To ensure the growth of a portfolio company, the investment team of a fund must work closely with the portfolio company’s management and have a keen understanding of such company’s business, financials, industry and other aspects of its operations. The investment team of a fund must possess real expertise in improving the operations of a portfolio company in order to generate positive returns from investments.

 

   

Available resources. Having strong and available resources is critical not only for securing investment opportunities but also for exiting existing investments. When sourcing potential investment targets, several funds may compete for the same target and, as such, the fund with the most resources, such as a broad investor base and network of industry professionals and intermediaries, access to industry experts, and knowledge of the latest market trends and industry updates, is most likely to win over other funds. When exiting an existing investment, a fund manager with an extensive network is better able to find new investors to buy out the fund manager’s equity stake in the investment.

 

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CORPORATE HISTORY AND STRUCTURE

We commenced business of management of corporate private equity funds in 2015. On August 3, 2015, our operating entity, Guangzhou Cornerstone Asset Management Co., Ltd., or CSC Guangzhou, was incorporated in Guangzhou, PRC, with registered capital of RMB 10 million. On May 25, 2017, Guangzhou Cornerstone Investment Management Co., Ltd. was incorporated in Guangzhou Province, PRC. It is wholly owned by CSC Guangzhou, and it maintains a registered capital of RMB10 million.

In 2017, we restructured our holding structure to facilitate our offshore listing. On July 5, 2017, our company, Cornerstone Management, Inc., was incorporated in the British Virgin Islands, with the authorized capital of 300,000,000 shares, par value of $0.001 per share.

On August 8, 2017, CSC Management Ltd., or CSC HK, was incorporated in Hong Kong as a wholly owned subsidiary of Cornerstone Management, Inc.

On September 8, 2017, Guangzhou Cornerstone Corporate Consulting Co., Ltd., our WFOE, was incorporated in Guangzhou, PRC, with registered capital of RMB5 million, as a wholly owned subsidiary of CSC HK.

On October 12, 2017, WFOE entered into a serial of contractual arrangements with the shareholders of CSC Guangzhou, through which WFOE has gained full control over the management and receives the economic benefits of CSC Guangzhou. See “— Contractual Arrangements.”

As of March 8, 2018, we have issued a total of 209,000,000 ordinary shares, held by Fundament Limited, Dawnlight Limited, Quick Harvest Consulting Limited, Lionwood Management Limited, Silver Stone Consulting Limited and Smark think Consulting Limited, respectively. See “Description of Share Capital – History of Securities Issuances.” On April 4, 2018, through a series of transfer arrangement, the then existing shareholders transferred certain shares to Henz Real Estate Development Limited, Infinitus Management Limited, Power Rock Consulting Limited, Gold Sea Management Limited and Gold Light Consulting Limited, respectively, as of a result of which, the then existing shareholders in aggregate hold 174,410,500 ordinary shares, while the remaining 34,589,500 ordinary shares are held by Henz Real Estate Development Limited, Infinitus Management Limited, Power Rock Consulting Limited, Gold Sea Management Limited and Gold Light Consulting Limited collectively.

In January 2018, we made an investment of RMB4.4 million (approximately $0.66 million) in Guangzhou Alfat Private Equity Securities Investment Fund Management Co., Ltd., in exchange for a 44% equity interest. We acquired such non-controlling equity interest as part of our efforts to diversify into quantitative trading in PRC securities and derivative product markets.

In May 2018, we made an investment of RMB16.25 million (approximately $2.59 million) in Beijing Cornerstone Asset Management Co., Ltd, or Beijing Cornerstone, in exchange for a 39% equity interest. Beijing Cornerstone primarily engages in fund distribution and consulting services. We acquired such non-controlling equity interest to facilitate our fund raising and distribution activities.

On August 21, 2018, Cornerstone Capital was incorporated in the Cayman Islands as our wholly-owned subsidiary. On the same date, Cornerstone SPC was incorporated in the Cayman Islands as a wholly-owned subsidiary of Cornerstone Capital. Cornerstone Capital and Cornerstone SPC currently do not have any operations. We plan to establish and manage funds through these two subsidiaries in the future.

On October 29, 2018, our company redeemed 60,610,000 ordinary shares in aggregate from all shareholders in pro rata based on their respective shareholding percentage through a one-for-zero point seven one (1 for 0.71) reverse stock split, which in turn decreased total 209,000,000 ordinary shares to 148,390,000 ordinary shares, without any change in par value per share.

 

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The following diagram illustrates our corporate structure, including our material subsidiaries, interests and consolidated variable interest entities as of the date of this prospectus:

 

 

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(1)

CSC Guangzhou is held directly by the following individuals: Mr. Xu He as to 37.5%; Ms. Qin Wu as to 37.5%; Mr. Tao Lin as to 5%; Mr. Weifeng Luo as to 10%; Mr. Xiaohai Zhuang as to 5%; Ms. Yueqin Zhao as to 3%; and Ms. Meifang Liu as to 2%. Mr. Xu He serves as our director and chief executive officer. Ms. Qin Wu is the mother of Mr. Xiaohai Zhuang and Mr. Xiaoyang Zhuang, and Mr. Xiaoyang Zhuang serves as our director and chief financial officer.

Contractual Arrangement

Due to PRC legal restrictions on foreign ownership in business of management of corporate private equity funds, we conduct our business in China through our variable interest entities by way of a series of contractual arrangements.

Agreement that Allows Us to Receive Economic Benefits from CSC Guangzhou

Exclusive Business Cooperation Agreement. On October 12, 2017, WFOE entered into an Exclusive Business Cooperation Agreement with CSC Guangzhou to enable WFOE to operate and manage substantially all of the assets and business of CSC Guangzhou and receive 100% of the net income of CSC Guangzhou before corporate income tax. Under this Agreement, WFOE has the exclusive right to provide CSC Guangzhou with comprehensive technical support, consulting services and other services in relation to the principal business during the term of this agreement utilizing its own advantages in human resources, technology and information.

 

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WFOE may enter into further consulting service agreements with CSC Guangzhou or any other party designated by CSC Guangzhou, which shall provide the specific contents, manner, personnel, and fees for the specific consulting service. This agreement became effective on October 12, 2017 and will remain effective unless otherwise terminated in writing by WFOE.

Agreements that Provide Us with Effective Control over CSC Guangzhou

Powers of Attorney. On October 12, 2017, each of shareholders of CSC Guangzhou, executed a Power of Attorney to WFOE and CSC Guangzhou, whereby the shareholders of CSC Guangzhou irrevocably authorize and constitute WFOE as their attorney-in-fact to exercise on the shareholders’ behalf any and all rights that shareholders of CSC Guangzhou have in respect of their equity interests in CSC Guangzhou. These seven Power of Attorney documents became effective on October 12, 2017 and will remain irrevocable and continuously effective and valid as long as the original shareholders of CSC Guangzhou remains as the shareholders of CSC Guangzhou.

Equity Interest Pledge Agreement. Under the Equity Interest Pledge Agreement dated October 12, 2017 among CSC Guangzhou, each of the shareholders of CSC Guangzhou and WFOE, each shareholder of CSC Guangzhou agreed to pledge all of his or her equity interests in CSC Guangzhou to WFOE to secure the performance of CSC Guangzhou’s obligations under the Exclusive Business Cooperation Agreement and any such agreements to be entered into in the future. Under the terms of the agreement, in the event that CSC Guangzhou 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 CSC Guangzhou shareholders also agreed that upon occurrence of any event of default, as set forth in the Equity Interest Pledge Agreement, WFOE is entitled to dispose of the pledged equity interest in accordance with applicable PRC laws. The shareholders of CSC Guangzhou agreed not to transfer, sell, pledge, dispose of or otherwise create any encumbrance on their equity interests in CSC Guangzhou without the prior written consent of WFOE. The pledge of each of the shareholders of CSC Guangzhou became effective on such date when the pledge of the Equity Interest contemplated herein was registered with relevant administration for industry and commerce and will remain effective until all payments due under the Business Cooperation Agreement have been fulfilled by CSC Guangzhou.

Agreements that Provide Us with the Option to Purchase the Equity Interest in CSC Guangzhou

Exclusive Option Agreement. CSC Guangzhou and each of its shareholders, have entered into an Exclusive Option Agreement with WFOE on October 12, 2017. Under the Exclusive Option Agreements, the CSC Guangzhou shareholders irrevocably granted WFOE (or its designee) an irrevocable and 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 CSC Guangzhou. According to the Exclusive Option Agreement, the purchase price to be paid by WFOE to each shareholder of the CSC Guangzhou will be the RMB10 or certain other amount permitted by applicable PRC Law at the time when such share transfer occurs. These seven Exclusive Option Agreements became effective on October 12, 2017 and will remain effective permanently.

In the opinion of GFE Law Office, our PRC legal counsel, the ownership structures of CSC Guangzhou, currently do not, and immediately after giving effect to this offering, will not result in any violation of the applicable PRC laws or regulations currently in effect; and the contractual arrangements among WFOE, CSC Guangzhou and its shareholders, are governed by PRC laws or regulations both currently and immediately after giving effect to this offering are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect.

However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to or otherwise different from the above opinion of our PRC legal counsel. It is uncertain whether any

 

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new PRC laws or regulations relating to VIE structures will be adopted or if adopted, what they would provide. If the PRC government finds that the agreements that establish the structure for the operation of CSC Guangzhou do not comply with PRC government restrictions on foreign investment in our businesses, we could be subject to severe penalties including being prohibited from continuing operations. See “Risk Factors — Risks Relating to Our Corporate Structure — Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate government and business operations.”

 

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OUR BUSINESS

Overview

We are a private equity fund manager in China primarily engaged in the management of private equity funds. Currently, we focus our investments primarily on China-based companies that are publicly listed or seeking to list in the United States, often referred to as U.S. China concepts stocks, particularly on companies in the TMT sector such as new economy companies. Our investments in such companies comprise all stages of the investment cycle: pre-IPO investments, IPO subscriptions, post-IPO secondary market investments (most often in the form of PIPE transactions) and privatizations. As we are a relatively young private equity fund manager in China with a limited operating history, our current business model is to identify investment targets first and raise capital to fund targeted transactions on a deal-by-deal basis as opposed to calling capital from committed investors. We believe that this model enables us to attract a large number of potential investors and raise capital quickly and efficiently as we are already able to present such potential investors with relatively detailed information on the pre-screened investment targets, thereby enhancing their confidence in the fund. As the investment targets are pre-identified, our ability to raise capital within a shorter period of time is critical to our ability to close the investment, which, in the longer term, is important to our reputation in China’s financial industry as well as our ability to raise capital to fund future investments. To date, we have been able to successfully close funding rounds for each of our funds generally within a short period of two to three months from the signing of a term sheet with our investment targets. During the fund raising process, we provide potential investors with information about our investment targets, including certain details in the signed term sheets such as a proposed investment target’s industry background, competitive strengths, performance history, and current stage in the investment cycle. We also provide third-party investors with financial advisory services, which primarily include identifying suitable target investment projects that fit the specific investment needs of investors based on our expertise, market resources, internal database and professional relationships with our industry peers.

We currently manage four categories of funds and one individual fund under our equity investment portfolio. The following table provides an overview of the performance of these funds as of and for the periods indicated:

 

    As of March 31, 2017           As of March 31, 2018           As of June 30, 2018              
    AUM     Total Amount of Returns           AUM     Total Amount of Returns           AUM     Total Amount of Returns              
    RMB
(in million)
    $
(in million)
    RMB
(in million)
    $
(in million)
    Net Annualized
Return from
Fund Inception
Date to
March 31, 2017
    RMB
(in million)
    $
(in million)
    RMB
(in million)
    $
(in million)
    Net Annualized
Return(1) from
Fund Inception
Date to
March 31, 2018
    RMB
(in million)
    $
(in million)
    RMB
(in million)
    $
(in million)
    Net Annualized
Return(1) from
Fund Inception
Date to
June 30, 2018
    Net IRR(2)  

East Value(3)

    366.2       55.3       44.4       6.7       42.1     2,352.3       355.5       45.5       6.9       3.1     2,895.3       437.5       764.8       115.6       38.5     39.9

Value Return

    336.4       50.8       4.2       0.6       1.9     473.3       71.5       1.1       0.2       0.1     494.0       74.7       21.8       3.3       2.4     2.3

Unicorn

    N/A       N/A       N/A       N/A       N/A       174.5       26.4       (24.5     (3.7     (293.5 %)      188.5       28.5       (25.8     (3.9     (17.2 %)      (16.8 %) 

Quantitative Hedging Funds(4)

    N/A       N/A       N/A       N/A       N/A       N/A       N/A       0.2       0.0       4.1     8.0       1.2       (0.4     (0.1     (4.2 %)      (4.1 %) 

Culture & Education

    49.3       7.5       (16.8     (2.5     (87.3 %)      42.0       6.3       (24.1     (3.6     (24.0 %)      43.5       6.6       (22.6     (3.4     (19.3 %)      (21.1 %) 

 

Note:

 

(1)

Net annualized return is calculated by averaging the total return on a yearly basis, net of all fees and expenses. Total return represents changes in the net asset value of the relevant fund calculated by comparing changes in the net asset value as of the last date of the period with that as of the fund inception date. For fund categories, annual return represents the asset-weighted average of the yearly return for all funds falling within that category. The fluctuations in net annualized return of each of the funds set out in this table were mainly attributable to the performance of the respective funds and the general market trends during the corresponding period.

 

(2)

Net internal return rate (“IRR”) represents the annualized IRR for the period indicated on investor invested capital based on contributions, distributions and unrealized value after management fees and expenses.

 

(3)

We exited our investment in East Value series under East Value category of funds in October 2017 before the terms of the relevant funds expired. In addition, we dissolved and liquidated investments under East Value II series under the East Value fund category in the second quarter of 2018 upon expiration of the term.

 

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(4)

As of March 31, 2017, no fund was established under this category. In July 2017, Asset Quantitative Hedging Strategy Fund I was established under this category with a term of six months. We dissolved this fund and liquidated its investments in January 2018 upon expiration of the term. We established Alfat II Quantitative Investment Private Fund under this category in April 2018.

For the years ended March 31, 2017 and 2018 and the three months ended June 30, 2017 and 2018, we raised funds totaling $102.2 million, $366.5 million, $54.9 million and $16.1 million, respectively. Since June 30, 2018, we established five new funds, raising a total capital of $84.7 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments”.

As part of our investment approach that is centered on creating value for our clients and partners, currently, we focus our private equity investments primarily on U.S. China concepts stocks and, in particular, on companies in the TMT sector such as new economy companies, when selecting our portfolio companies.

According to the CIC Report, China has seen a growing emergence of start-ups in sectors such as AI, green technologies and e-commerce, driven by the recent policy updates of the PRC government that emphasize technology and innovation, entrepreneurship and environmental protection, among other areas. For instance, policies aimed at expanding corporate financing channels and relaxing tax burdens for companies in the TMT sector and other emerging high-tech start-up companies have driven the significant development of TMT and innovative enterprises in China, such as media application and e-commerce platforms. From 2014 onwards, the total amount of investments made by private equity and venture capital funds in the TMT sector increased significantly to reach $20.1 billion in the second quarter of 2016 on a quarterly basis and the first half of 2017 saw a total of $30.8 billion invested into TMT sectors in China according to the CIC Report. Meanwhile, the PRC government has favored research and development of new technologies such as AI and robotics, promoting the wide application of these and other new and advanced technologies in the daily lives of the people through the use of everyday objects and products such as smart home devices, automobiles and healthcare products, among others. In addition, the PRC government’s strong emphasis on environmental protection, which has facilitated increased investments in green technologies such as solar, electric vehicles and recyclable technologies, has led to the significant and continued development of these sectors as well as a growing emergence of start-ups in these and related industries. With substantial support from the government, the TMT sector is expected to achieve strong performance in the future, according to the CIC Report. While our target investments are not restricted to specific sectors, and we may in future expand our fund portfolio to include other industries, we believe that China’s TMT sector in particular will continue to experience rapid growth in the foreseeable future in line with such national policies, and we intend to capitalize on investment opportunities created by the expected growth in these sectors.

We believe that our strong investor base lends credibility to our brand and reputation as well as enhances our capital raising capabilities. Our client base consists of individual investors and institutional investors. As of June 30, 2018, our individual investors and institutional investors accounted for 97.9% and 2.1% of our total number of investors, respectively, and accounted for 83.9% and 16.1% of our total raised capital, respectively. All of our individual investors are high income individuals in China with an annual salary of RMB500,000 (approximately $75,000) and above and our individual investor base has expanded since August 2015 to reach over 800 individual investors as of June 30, 2018. Moreover, as of June 30, 2018, investors that had invested in two or more of our funds since our inception accounted for approximately 9.74% of our total investors. We believe that the number of our multi-fund investors and our ability to raise successor funds under existing portfolios and strategies demonstrate the stability and loyalty of our investor base. To date, all of our investors are PRC nationals or entities and none of our investors, whether individual or institutional, represented 10% or more of our total investment funds in terms of amount of raised capital.

We work for our fund investors by investing their wealth in companies that we believe offer a strong combination of quality, growth, yield and valuation. As of June 30, 2018, we had a team of 18 investment professionals experienced in analyzing the performance of markets and managing our portfolio of equity funds within our risk management

 

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and control framework. Fostering an investment culture that is rooted in servicing client relationships, we seek to deliver attractive returns while managing risks. Our fund managers have continued to select quality, potentially high-growth companies for inclusion in our portfolio by leveraging their knowledge, understanding of China-based companies, domestic investors’ demands and overseas markets, including primarily those in the United States. We believe that the collective experience and industry expertise of our investment professionals are key factors that have enabled us to achieve rapid and significant growth since our inception in August 2015 as well as generate attractive returns on relatively short-term investments for our fund investors.

We generate revenues in connection with our fund management services from subscription fees, management fees and carried interest. For the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2017 and 2018, our revenue generated from subscription fees amounted to $876,120, $2.9 million, $499,438 and $155,038, respectively, accounting for 13.6%, 22.9%, 18.0% and 0.7% of our total revenue, respectively. For the same periods, our revenue generated from management fees amounted to $473,797, $4.4 million, $469,285 and $2.1 million, respectively, accounting for 7.4%, 34.6%, 16.9% and 9.2% of our total revenue, respectively. Our profitability is dependent upon our investment performance, which drives the value of AUM on which carried interest is calculated. We recorded realized carried interest in the amount of $2.1 million and $546,863 for the year ended March 31, 2018 and for the three months ended June 30, 2018, respectively. We recorded unrealized carried interest in the amount of $1.6 million, $2.6 million and $19.8 million for the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2018, respectively, accounting for 25.1%, 20.2% and 87.7% of our total revenue for the same periods, respectively. With respect to our financial advisory services, we charge investors for sourcing investment targets, conducting due diligence, structuring transactions and facilitating negotiations between investors and target investment companies, and we recognize financial advisory fees as services are rendered, over a period of time. For the years ended March 31, 2017 and 2018 and for the three months ended June 30, 2018, our revenue generated from financial advisory services was $3.5 million, $711,428 and nil, respectively, accounting for 53.9%, 5.6% and nil of our total revenue, respectively. We expect that, as we continue to develop our equity investment portfolio and strengthen our reputation in the private equity sector, a substantial majority of our revenue will be derived from our fund management services going forward.

For the year ended March 31, 2017, our total revenue and net income amounted to $6.4 million and $2.7 million, respectively. For the year ended March 31, 2018, our total revenue and net income amounted to $12.8 million and $2.9 million, respectively. For the three months ended June 30, 2018, our total revenue amounted to $22.6 million, representing an increase of 707.1% as compared to $2.8 million for the same period in 2017, and our net income amounted to $10.2 million, representing an increase of 750.0% as compared to $1.2 million for the same period in 2017.

Competitive Strengths

Unique positioning and demonstrated rapid growth

Currently, we are focused on investing in China-based companies that are publicly listed or are seeking to list in the United States, often referred to as U.S. China concepts stocks, particularly on companies in the TMT sector such as new economy companies. Our investments in such companies comprise all stages of the investment cycle: pre-IPO investments, IPO subscriptions, post-IPO secondary market investments (most often in the form of PIPE transactions) and privatizations. Our investor base comprises high income individuals and institutional investors in China. We believe that our market positioning is unique and attractive for the following reasons:

 

   

Supply and demand. In recent years, there have been limited options for Chinese investors to invest their capital overseas as a result of measures that China has implemented to restrict currency exchange and curb outbound capital. On the supply side, we are able to invest into the QDII plans established by our financial institution partners which enables us to provide investors with channels for the outflow of capital into foreign markets. On the demand side, with China experiencing a rapid rise in its private

 

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wealth, many high income investors, together with institutional investors, are increasingly seeking to make offshore investments to diversify their investments and seek higher gains. According to the CIC Report, the U.S. capital markets, in particular, have become attractive to China-based investors because: (i) these markets are well-developed with a sophisticated institutional investor base; (ii) the United States has been a popular listing venue for high-growth China-based companies with which Chinese investors are familiar; and (iii) the U.S. stock markets have historically offered more stable and better returns than China’s stock markets.

 

   

Short lifecycle of our funds. Our funds tend to have a shorter lifecycle of less than 2.5 years in average, as compared to typical private equity funds which have lifecycles ranging from 4 to 15 years, according to the CIC Report.

 

   

Higher entry barrier. According to the CIC Report, new competing funds seeking to replicate our business model may face higher entry barriers because (i) a fund without the QDII license has to be able to gain access to overseas investments for currency exchange purposes (which is becoming more restricted); (ii) a fund needs to demonstrate an established track record to attract potential investors and to raise adequate capital; and (iii) private equity funds are required to register with the AMAC, which are subject to increasingly stringent scrutiny in recent years. See “Industry — Private Equity in China — The Qualified Domestic Institutional Investor Program.”

For the year ended March 31, 2018, we raised funds totaling $366.5 million, representing an increase of 258.6% from $102.2 million for the year ended March 31, 2017. Our assets under management increased significantly from approximately $113.6 million as of March 31, 2017 to approximately $459.7 million as of March 31, 2018, and further to approximately $548.5 million as of June 30, 2018. Since June 30, 2018, we established five new funds, raising a total capital of $84.7 million.

Strong performance record and increasing market recognition

We have delivered strong performance since the launch of our funds in 2015. Currently, we focus our investments primarily on U.S. China concepts stocks. Our East Value fund category comprised most of our funds that invested in U.S. China concepts stocks as of June 30, 2018 and had a total return of 30.85% within a short period of approximately three years, representing attractive performance on relatively short-term investments for our fund investors. Several of our funds under our East Value fund category have outperformed major stock market indices in China and the United States. For example, our East Value series under our East Value fund category achieved an accumulated income growth of 26.6% from March 2016 to March 2017, compared to an accumulated income growth of 7.3%, (0.3)%, 14.7% and 16.8% on the Shanghai Composite Index, Shenzhen Component Index, S&P 500 and Dow Jones Industrial Average, respectively, over the same period according to the CIC Report. As of June 30, 2017, our East Value series and East Value II series generated annualized returns of 37.7% and 34.4%, respectively, and our East Value II series generated annualized return of 14.7% as of March 31, 2018, surpassing the performance of several other major private equity funds in China that invest in overseas markets. Moreover, we have exited all of our funds under our East Value series and East Value II series by selling our IPO subscription investment or PIPE investment in China-based companies listed on NASDAQ. East Value series generated total returns of $5.7 million as well as net IRR of 41.1% over a short period of less than two years, and East Value II series generated total returns of $8.6 million as well as net IRR of 18.4% over a term of 18 months, further testifying to the success and cost-effectiveness of our funds. Although our Unicorn fund category, Quantitative Hedging Funds fund category and Culture & Education fund recorded negative returns as of June 30, 2018 because they were either invested in growth stage companies or had not completed investments as of June 30, 2018, we expect these funds to deliver positive performance in the long term. See “— Family of Funds and Investment Performance — Our Funds.”

As a result of our strong performance record, we were awarded “China’s Top 10 New Private Equity Investment Institutions in 2016” by CVINFO, one of China’s leading investment-related news platform, “China’s Best New

 

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Private Equity Fund Manager in 2016” by Simuwang.com, a leading PRC private equity ratings organization, and the “Outstanding Private Equity Fund of the Year” in 2017 by Wall Street CN, one of China’s largest internet providers of financial information and data. We believe that these awards reflect our growing reputation in the industry and increasing market recognition for quality and success.

Proven capital raising capabilities

Our model is to raise capital to fund targeted transactions as opposed to calling committed capital. Such model enables us to attract a greater number of potential investors and raise capital more quickly and efficiently as we are already able to present such potential investors with relatively detailed information on the pre-screened investment targets, thereby enhancing their confidence in the fund. As the investment targets are pre-identified, our ability to raise capital in a shorter term is critical to our ability to close the investment, which, in the longer term, is important to our reputation in China’s financial industry and among its professionals as well as our ability to raise capital to fund future investments. In general, we have been able to close funding rounds for each of our funds successfully within an average of two to three months from the signing of a term sheet with our investment targets, which is shorter than the average of six to 18 taken in the industry for fundraising activities according to the CIC Report.

We have maintained a loyal investor base which primarily includes a growing number of high income individuals in China with an annual salary of RMB500,000 (approximately $75,000) and above. Our total active high income individual client base has increased since our inception in August 2015 to 426 and 1,449 as of March 31, 2017 and 2018, and remain relatively stable at 1,407 as of June 30, 2018. Our investor base also includes several institutional investors. As of June 30, 2018, investors that have invested in two or more of our funds since our inception accounted for approximately 9.7% of our total investors, which we believe demonstrates the stability and loyalty of our investor base and is a reflection of our proven record for success, investment process and risk management policies as well as the strength of our team. We believe that our access to a broad portfolio of private investors will enable us to continue to quickly and successfully secure deals.

Established industry and corporate relationships

We have established relationships with a number of leading securities firms, other financial intermediaries and major corporations in China, which we believe have provided and will continue to provide us with the following critical benefits:

 

   

Joint fundraising. We conduct joint fundraising with several leading firms, including JD Finance, Fanhua Inc. and Hang Tang Wealth, which provide us access to additional investors.

 

   

Currency exchange quota. Private equity firms operating in China that do not qualify as a QDII must be able to enter into arrangements with a licensed QDII in order to invest in the QDII plans set up by such QDIIs to access in overseas markets. As approved QDIIs, major securities firms that we partner with specifically designated QDII plans for us because of our strong performance record, increasing market recognition, proven capital raising capabilities and long-standing relationships with them, giving us an edge over many domestic players as such arrangements enable us to gain access to the U.S. capital markets in an environment where currency and capital controls are increasingly stringent. See “Industry — Private Equity in China — The Qualified Domestic Institutional Investor Program.”

 

   

Sourcing investment targets. Our extensive network of contacts at financial institutions, corporate partners, third-party financial advisors and other financial intermediaries in China have contributed to our deal flow, providing us with leads in identifying potential investment targets and generating investment opportunities.

We view these strong relationships as a core asset and believe that they have been valuable resources for developing our financing channels, fund portfolios and professional network.

 

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Experienced team of investment professionals

Our team of investment professionals is led by our founders, Mr. Xu He, our chief executive officer, and Mr. Xiaoyang Zhuang, our chief financial officer, each of whom has more than nine years of experience in the financial advisory business which has provided them with a sound understanding of the investment environment in the United States, regulatory requirements and management of U.S. China concepts stocks. Moreover, our founders possess the acute ability to source investment targets, evaluate investment opportunities and execute strategies. Their depth of experience as financial advisors has also exposed them to a wide network of contacts at major PRC securities firms and other financial intermediaries, which continues to facilitate the capital raising process for our funds. Together, our founders have assembled and steered a strong team of 18 investment professionals from our investment research department and funds operations department with complementary perspectives and an average of more than eight years of securities and investment experience. Fostering an investment culture that is rooted in servicing client relationships and seeking to deliver attractive returns while managing risks, this talented team has continued to select quality, potentially high-growth companies for inclusion in our portfolio by leveraging their knowledge, understanding of China-based companies, domestic investors demand and overseas markets, including primarily those in the United States. Under the leadership of this team, we have been able to achieve rapid expansion and significant growth since our inception.

Business Strategies

We intend to create value for our shareholders by:

 

   

identifying exceptional investment opportunities to bolster our strong performance record;

 

   

broadening our base of private investors to expand our capital base;

 

   

growing our assets under management across our fund portfolios by raising new investment funds;

 

   

diversifying our investment portfolio by selecting investment portfolio companies from other industries and regions;

 

   

developing nationwide business operations and coverage by expanding our sales, marketing and fund management teams; and

 

   

strengthening our brand and market reputation to become a leading boutique private equity fund manager.

Family of Funds and Investment Performance

Overview

Currently, we focus our investments primarily on China-based companies publicly listed or seeking to list in the United States, often referred to as China concepts stocks, particularly on companies in the TMT sector such as new economy companies. Our investments in such companies comprise all stages of the investment cycle: pre-IPO investments, IPO subscriptions, post-IPO secondary market investments (most often in the form of PIPE transactions) and privatizations. We also make smaller domestic investments in China. In our early days, we also made hedging transactions on commodity futures markets. Our model is to raise capital to fund targeted transactions as opposed to calling capital from committed investors. For the years ended March 31, 2017 and 2018, our funds raised RMB676.5 million ($102.2 million) and RMB2,424.9 million ($366.5 million), respectively, and as of June 30, 2018, we had a total AUM of RMB3,629.3 million, equivalent to approximately $548.5 million.

 

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We currently manage four categories of funds and one individual fund. The following table sets forth the details of our portfolio of funds:

 

Fund category

 

Total capital

raised as of
June 30, 2018
(in RMB million)

 

Total capital

raised as of
June 30, 2018
(in $ million)

 

Primary type of

Investment

 

Investment Targets

East Value

 

2,479.4

 

374.6

 

•  IPO subscription

•  PIPE

 

•  a China-based call center business process outsourcing provider

•  a China-based wastewater purification treatment company

•  a China-based manufacturer and distributor of eco-friendly construction materials

•  a China-based premier producer of high quality pet food

•  other China-based companies

Value Return 

 

472.2

 

71.4

 

•  Privatization

 

•  a China-based mobile game publisher

Unicorn

 

214.3

 

32.4

 

•  Minority equity investment

 

•  a China-based video sharing website

Culture & Education

 

66.1

 

10.0

 

•  Minority equity investment

 

•  a China-based technology and internet vocational education services provider

Quantitative Hedging Funds

 

19.9

 

3.0

 

•  Hedging transactions on PRC commodity futures markets

  N/A

The following table sets forth the AUM and performance of our funds as of and for the periods indicated:

 

    As of March 31, 2017           As of March 31, 2018           As of June 30, 2018              
    AUM     Total Amount of Returns           AUM     Total Amount of Returns           AUM     Total Amount of Returns              
    RMB
(in million)
    $
(in million)
    RMB
(in million)
    $
(in million)
    Net Annualized
Return from
Fund Inception
Date to
March 31, 2017
    RMB
(in million)
    $
(in million)
    RMB
(in million)
    $
(in million)
    Net Annualized
Return(1) from
Fund Inception
Date to
March 31, 2018
    RMB
(in million)
    $
(in million)
    RMB
(in million)
    $
(in million)
    Net Annualized
Return(1) from
Fund Inception
Date to
June 30, 2018
    Net IRR(2)  

East Value(3)

    366.2       55.3       44.4       6.7       42.1     2,352.3       355.5       45.5       6.9       3.1     2,895.3       437.5       764.8       115.6       38.5     39.9

Value Return

    336.4       50.8       4.2       0.6       1.9     473.3       71.5       1.1       0.2       0.1     494.0       74.7       21.8       3.3       2.4     2.3

Unicorn

    N/A       N/A       N/A       N/A       N/A       174.5       26.4       (24.5     (3.7     (293.5 %)      188.5       28.5       (25.8     (3.9     (17.2 %)      (16.8 %) 

Quantitative Hedging Funds(4)

    N/A       N/A       N/A       N/A       N/A       N/A       N/A       0.2       0.0       4.1     8.0       1.2       (0.4     (0.1     (4.2 %)      (4.1 %) 

Culture & Education

    49.3       7.5       (16.8     (2.5     (87.3 %)      42.0       6.3       (24.1     (3.6     (24.0 %)      43.5       6.6       (22.6     (3.4     (19.3 %)      (21.1 %) 

 

Note:

 

(1)

Net annualized return is calculated by averaging the total return on a yearly basis, net of all fees and expenses. Total return represents changes in the net asset value of the relevant fund calculated by comparing changes in the net asset value as of the last date of the period with that as of the fund inception date. For fund categories, annual return represents the asset-weighted average of the yearly return for all funds falling within that category. The fluctuations in net annualized return of each of the funds set out in this table were mainly attributable to the performance of the respective funds and the general market trends during the corresponding period.

 

(2)

Net internal return rate (“IRR”) represents the annualized IRR for the period indicated on investor invested capital based on contributions, distributions and unrealized value after management fees and expenses.

 

(3)

We exited our investment in East Value series under East Value category of funds in October 2017 before the terms of the relevant funds expired. In addition, we dissolved and liquidated investments under East Value II Series under the East Value fund category in the second quarter of 2018 upon expiration of the term.

 

(4)

As of March 31, 2017, no fund was established under this category. In July 2017, Asset Quantitative Hedging Strategy Fund I was established under this category with a term of six months. We dissolved this

 

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  fund and liquidated its investments in January 2018 upon expiration of the term. We established Alfat II Quantitative Investment Private Fund under this category in April 2018.

Our Funds

We currently manage a number of funds under four main fund categories, namely, East Value, Value Return, Unicorn, and Quantitative Hedging Funds. We also manage one individual fund, namely, Culture & Education.

As of June 30, 2018, certain funds under our four fund categories had not completed their investments. As these funds began incurring operational costs in relation to fund management as soon as they were established, and do not record any gains until after completing their investments, such funds recorded negative returns as of June 30, 2018. In addition, as certain of our funds primarily invest in growth stage companies, which are expected to take time before they start to deliver positive performance, these investments generated negative returns as of June 30, 2018, because they began incurring operational costs upon their establishment. See “Risk Factors—Risk Related to Our Business and Industry—Our funds invest in relatively high-risk assets, and the performance of our funds may be adversely affected by the financial performance of our portfolio companies and the industries in which our funds invest.”

East Value Category

Under our East Value category of funds, we primarily make investments in publicly traded companies including IPO subscriptions and secondary market investments in the form of PIPE transactions. There are 37 funds under our East Value category of funds.

East Value Series

We established five funds under East Value series in January 2016, March 2016, March 2016, March 2016 and April 2016, respectively. Proceeds from our East Value series were invested in the IPO subscription of one China-based company listed on the NASDAQ. One of the funds had an original term of three years and was expected to end in January 2019 while the other four funds had a term of two years and were expected to end within the first half of 2018. In October 2017, we exited all of our investments under East Value series and generated a total return on investment of 73.5% and total returns of $5.7 million from this fund series.

East Value II Series

We established three funds under our East Value II series in November 2016, December 2016, and January 2017, respectively. Each fund under our East Value II series has a term of 18 months. Proceeds from our East Value II series were primarily invested in the PIPE transactions of China-based companies listed on the NASDAQ. In the second quarter of 2018, we dissolved and liquidated investments under our East Value II series upon expiration of the terms of the relevant funds, and generated a total return on investment of 28.1% and total returns of $8.6 million.

East Value III Series

We established two funds under our East Value III series in March 2017 and May 2017, respectively. Each fund under our East Value III series has a term of two years. Proceeds from our East Value III series were primarily invested into the IPO subscriptions and the PIPE transactions of China-based companies listed on the NASDAQ.

East Value IV Series

We established four funds under our East Value IV series in August 2017, July 2017, June 2017 and July 2017, respectively. Each fund under our East Value IV series has a term of two years. Proceeds from our East Value IV series were primarily invested in the IPO subscription and the PIPE transactions of China-based companies listed on NASDAQ and minority equity investments in a growth stage China-based TMT company.

 

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East Value Serial

Our East Value Serial fund was established in June 2017 and has a term of two years. Investment under our East Value Serial fund includes a minority equity investment in a growth stage China-based TMT company.

Cornerstone East Value III

Our Cornerstone East Value III fund was established in August 2017 and has a term of two years. Investments under this fund primarily includes the IPO subscriptions and the PIPE transactions of China-based companies listed on the NASDAQ.

Cornerstone East Value IV

Our Cornerstone East Value IV fund was established in August 2017 and has a term of two years. Investments under our Cornerstone East Value IV fund include the IPO subscriptions and PIPE transactions of China-based companies listed on NASDAQ.

East Value Hairong I

Our East Value Hairong I fund was established in August 2017 and has a term of two years. Investments under our East Value Hairong I fund include the IPO subscription and the PIPE transactions of China-based companies listed on NASDAQ.

Cornerstone East Value VII Series

We established two funds under our Cornerstone East Value VII series in November 2017 and December 2017, respectively. Each fund under our Cornerstone East Value VII series has a term of two years. Investments under our Cornerstone East Value VII series include the IPO subscription and the PIPE transactions of China-based companies listed on the NASDAQ.

Yixian East Value V

Our Yixian East Value V fund was established in November 2017 and has a term of two years. Proceeds from our Yixian East Value V fund were invested into the IPO subscription and the PIPE of China-based companies listed on the NASDAQ.

East Value Haihui I

Our East Value Haihui I fund was established in November 2017 and has a term of two years. Proceeds from our East Value Haihui I fund were primarily invested into the IPO subscription and the PIPE transactions of China-based companies listed on the NASDAQ.

Cornerstone East Value V Series

We established three funds under our Cornerstone East Value V series in December 2017, December 2017 and January 2018, respectively. Each fund under our Cornerstone East Value V series has a term of two years. Proceeds from our Cornerstone East Value V series were primarily invested into the IPO subscription and the PIPE transactions of China-based companies listed on the NASDAQ.

East Value V Series

We established four funds under our East Value V series in December 2017, December 2017, January 2018 and March 2018, respectively. Each fund under our East Value V series has a term of two years. Proceeds from our

 

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East Value V series were primarily invested into the IPO subscription, minority equity investments in growth stage China-based TMT companies and the PIPE transactions of China-based companies listed on the NASDAQ.

East Value Select V

Our East Value Select V fund was established in December 2017 and has a term of two years. Proceeds of our East Value Select V fund were primarily invested into minority equity investments in growth stage China-based TMT companies.

East Value Hairong II

Our East Value Hairong II fund was established in February 2018 and has a term of two years. Investments under our East Value Hairong II fund primarily include the IPO subscription and the PIPE transactions of China-based companies listed on the NASDAQ.

Cornerstone East Value Discovery I

Our East Value Discovery I fund was established in January 2018 and has a term of two years. Investments under our East Value Discovery I fund primarily include the IPO subscription and the PIPE transactions of China-based companies listed on the NASDAQ.

East Value IX Series

We established two funds under our East Value IX Series in February 2018 and April 2018, respectively. Each fund under our East Value IX series has a term of two years. As of June 30, 2018, we had not completed investments under this series of funds.

East Value VIII

Our East Value VIII was established in April 2018 and has a term of two years. As of June 30, 2018, we had not completed any investments under this fund.

East Value X Series

We established two funds under East Value X series in May 2018 and June 2018, respectively. Each fund under our East Value X series has a term of two years. As of June 30, 2018, we had not completed any investments under this fund.

Value Return Category

We established two funds under our Value Return category in July 2016 and July 2016, respectively. Investments under the Value Return category of funds primarily leveraged in the going private transactions of a NASDAQ listed China-based mobile game publisher. The target company completed its privatization in September 2016. As of March 31, 2018 and June 30, 2018, the total return on our investments made under Value Return category was 0.2% and 4.6%, respectively.

Unicorn Category

Unicorn Series I

We established two funds under our Unicorn series I in August 2017 and September 2017, respectively. Each fund under our Unicorn category has a term of three years. Proceeds from our Unicorn series I were primarily invested into minority equity of a growth stage China-based TMT company.

 

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Yixian Unicorn I

We established Yixian Unicorn I in August 2017 which has a term of three years. Proceeds of our Yixian Unicorn I were primarily invested into minority equity investments in a growth stage China-based TMT company.

Unicorn Series II

We established two funds under our Unicorn Series II in March 2018 and April 2018, respectively. Each fund under our Unicorn Series II has a term of five years. Proceeds from our Unicorn Series II were primarily invested into a TMT company.

Quantitative Hedging Funds

Asset Quantitative Hedging Fund I

We established Asset Quantitative Hedging Strategy Fund I in July 2017, under which we make hedging transactions on PRC commodity futures markets. Our management made a minority investment of RMB2.8 million in this fund. Our Asset Quantitative Hedging Strategy Fund I has a term of six months. We dissolved this fund and liquidated its investments in January 2018 upon expiration of its term, and generated a total return on investment of 2.1%.

Alfat II Quantitative Investment Private Fund

We established Alfat II Quantitative Investment Private Fund under our Quantitative Hedging Funds category in April 2018. Our Alfat II Quantitative Investment Private Fund has a term of one year, under which we made hedging transactions on PRC securities and derivative products markets.

Others

Culture & Education

Under our Culture & Education fund, established in April 2016, we made buyout investments in a PRC technology and internet vocational education services provider. In September 2017, our investee entered into a share purchase agreement with a public company listed on the Shenzhen Stock Exchange ChiNext market, pursuant to which such public company is to purchase our investee through a cash and stock acquisition. The acquisition has not been completed, and which may be delayed or may not materialize. See “Risk Factors — Risks Related to Our Business and Industry — If we are unable to successfully design and implement our fund exit strategies, we may not realize the expected returns or we may suffer losses on our fund investments.” Our Culture & Education fund has a term of three years. As of June 30, 2018, we had a negative return on investment under this fund of 34.2%. We expect to generate positive returns under this fund upon the expected acquisition of the relevant portfolio company by the PRC-listed company.

Investment Approach

We adopt a disciplined investment approach that is centered on creating value for our clients and partners. The key investment principles of our private equity funds are as follows:

 

   

Focus on China-based companies publicly listed or seeking to list in the United States, particularly on companies in the TMT sector. Our management has significant experience advising and investing in U.S. China concepts stocks, and we have accumulated the capabilities for sourcing investment targets

 

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