Difficulties of private equity funds: those "black under the lights" that have to be guarded against

introduction

Sister Sa’s team has been working on the frontline of handling cases and found that certain tracks of private equity investment have natural legal risks, but private equity practitioners do not distinguish between risk levels, and some practitioners rashly entered some companies in this track and did not Arranged to serve as directors and other management personnel, once a case occurs, these private equity practitioners will be called to testify at least, or become one of the defendants in the joint crime**. Today, Sister Sa will talk to you based on her first-hand experience, several major risks that are easily overlooked in the PE circle.

01 **Dark horse of the new track, have you paid attention to the red line issue? **

Every era has a new track. More than ten years ago, P2P first emerged. At that time, some PE institutions in the Yangtze River Delta spread pepper noodles and invested in many domestic online lending platforms. With the clarification of the regulatory situation, online lending is suspected of illegally absorbing public deposits and fund-raising fraud. There are many people who are deeply involved in the operation of private equity funds as tainted witnesses and people involved in the case.

In recent years, AI and Web3.0 have become bright spots, but criminal risks are not uncommon:

**First, the criminal risk of violating citizens’ personal information. **Data or personal information is an important material for training AI models, and its criticality is beyond doubt. It can be said that without enough data, a sufficiently powerful AI cannot be formed. Therefore, for AI service providers or Web3.0 practitioners As far as personnel are concerned, they must abide by regulations such as the “Network Security Law”, “Data Security Law” and “Personal Information Protection Law”. In this regard, Article 21 of the “Interim Measures for the Administration of Generative Artificial Intelligence Services” that will come into force clearly stipulates that "If the provider violates the provisions of these measures, the relevant competent authority shall follow the “Network Security Law of the People’s Republic of China”, “Data Security Law of the People’s Republic of China”, “Personal Information Protection Law of the People’s Republic of China”, “Scientific and Technological Progress of the People’s Republic of China” Law and other laws and administrative regulations shall be punished; where there is no provision in laws and administrative regulations, the relevant competent department shall issue warnings, circulate criticisms in accordance with its duties, and order corrections within a time limit; where corrections are refused or the circumstances are serious, the provision of relevant services shall be ordered to be suspended. If it constitutes a violation of public security management, it shall be punished according to law; if it constitutes a crime, it shall be investigated for criminal responsibility according to law.” Among them, the most likely trigger is the crime of violating citizens’ personal information due to illegal collection or processing of personal information, so It must be vigilant.

**Second, the criminal risk of copyright infringement. **In the aforementioned process, the materials used to train the AI model often contain a large number of third-party works, and because the early industry norms have not yet been perfected, many AI and Web3.0 companies directly choose to crawl data from the Internet for feeding. However, such acts have not been authorized by the copyright owner, and may even make the produced works completely infringing works. In this case, the relevant parties may be suspected of constituting the crime of copyright infringement, and thus may be subject to criminal punishment.

**Third, the criminal risk of fraud. **Due to the convenience of AI technology, many criminals have used AI technology to commit fraud. This new type of fraud is hard to detect because of its “realistic” effect. In addition, there are also many criminal gangs carrying out frauds under the banner of AI and Web3.0. In essence, they do not have any AI or Web3.0 technology, or although they have related products, they are mainly used to cooperate with gangs to carry out fraud. , the behavior of course has a great criminal legal risk.

To sum up, in recent years, the field of AI and Web3.0 has not been calm, and private equity practitioners need to do a good job of investigation in advance to prevent themselves from being caught in the turmoil.

02 **Named executives, be careful to constitute a joint crime! **

Some private equity practitioners may think that even if the company they invest in is involved in a crime, it has nothing to do with the private equity fund as an investor, and it is impossible for them to have criminal legal risks. But in fact, the so-called joint crime, according to the “Criminal Law”, refers to “two or more joint intentional crimes.” The joint intentional crime here does not only refer to joint action, joint planning, or joint decision-making, or just participating in it may be suspected of constituting a joint crime. In a crime involving an enterprise, the criteria for judging a joint crime largely depends on whether the perpetrator actually participates in it. Participation here includes implementation, decision-making, and operation. Even if the perpetrator does not have substantial decision-making power, But **Once they belong to the roles of executives or legal representatives of the companies involved in the case, they will naturally have the risk of being suspected of joint crimes. In practice, this type of people is often the focus of the public security organs. It may not be very effective to argue that one is just a “nominal” leader. Therefore, practitioners of private equity funds must also pay attention to the risks involved. It does not mean that the identity of an investor can completely isolate criminal law risks.

03 **When breaking information asymmetry, is it accompanied by major risks? **

The financial market itself is a battle of information asymmetry, and the private equity field is no exception. In the case sponsored by Sister Sa’s team, we found that the important work of the GP is to go to the invested company or the company to be invested and its upstream and downstream, invite people to eat and chat, and obtain first-hand information on project progress and actual controllers, so as to judge whether the company will be big or not. Whether the timing of development or MA is in place.

However, this information may be the intelligence in the “Anti-espionage Law”. If you are not careful, the legal net will be restored. Specifically, according to the provisions of Article 4 of the “Counter-espionage Law”, if such information that can be identified as intelligence or other information related to national security and interests is provided to foreign institutions, organizations or individuals, or is provided to spies Organizations or their agents (whether they are foreign subjects or not), such acts may be judged to constitute espionage, and in severe cases, they may even be suspected of constituting espionage. At this time, GPs have a great criminal risk.

Even if the above problems are not touched, there is a personal weakness that is difficult to overcome, that is, knowing the inside information of the company and not wanting to make a lot of money. It is also a case that Sister Sa’s team personally experienced in a coastal city. The boss of a private equity company often went to a well-known listed company invested by the parent company to meet the chairman for tea. Only then did he guess which company was acquired, and then he used the stock accounts of his relatives and friends to operate and benefited a lot. He was finally discovered by the inspection team and imprisoned. In another case involving the same crime, a certain actual controller leaked his words at a meeting of middle-level cadres, and there was a big MA order, which resulted in the leakage of inside information, which also caused major legal risks.

It may be a common practice for many private equity funds to seek information through alumni networks, fellow villagers, and business partnerships to make investment decisions. However, in the judicial environment of our country, we must strictly abide by laws and regulations, and we must not transfer important data and information to upstream foreign parent companies, nor use the information we have found out to seek illegitimate interests for individuals or companies.

04 **Inquire about news and crawl data properly! **

Crawling important business data as an investment decision is suspected of illegally obtaining computer information system data. The so-called crime of illegally obtaining computer information system data, according to the provisions of the “Criminal Law”, refers to "violating state regulations, invading computer information systems other than state affairs, national defense construction, and cutting-edge science and technology, or using other technical means to obtain such computer information systems. The data stored, processed or transmitted in the Internet, the circumstances are serious "acts. In practice, there are many cases where crawling data using crawler software constitutes a crime. For example, in the (2021) Hu 0104 Xingchu No. 148 Judgment, Li, the legal representative of a company, ordered Wang, the person in charge of the company’s department, to divide the work and cooperate. , using IP proxy, “X-sign” signature algorithm and other means to break through and bypass Taobao’s protection mechanism, and then use the data capture program (commonly known as “crawler”) to capture a large number of anchors stored by Taobao during Taobao’s live broadcast. The starting address, sales, viewing PV, UV and other data. In the end, the court found that the act constituted a crime of illegally obtaining computer information system data. Therefore, **For practitioners of private equity funds, it may not be legal to use crawler software to crawl business data, and careful decision-making is required. **

Written at the end

In addition to the more typical GPs who package themselves as overseas returnees to defraud LPs of funds, the above items are the problems we found in the actual handling of the case. A friend revealed that there are many commercial espionage in PE circle, we have not personally handled similar cases, but we can deduce that “the most profitable business is written in the criminal law”.

We suggest that private equity funds can identify and classify the criminal law risks in the business of the new track before investing, and don’t send people to settle in across the board, otherwise they will become joint criminals who work together. At the same time, pays attention to the red line education for employees and middle managers, not to be arrogant, to have a full understanding of information and intelligence, and to reduce the probability of being imprisoned.