Draft Registration Statement
Table of Contents

CONFIDENTIAL TREATMENT REQUESTED BY REGISTRANT

As confidentially submitted to the Securities and Exchange Commission on June 17, 2015

Registration No. 333-            

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Yirendai Ltd.

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands 6199 Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

4/F, Building 2A, No. 6 Lang Jia Yuan

Chaoyang District, Beijing 100022

The People’s Republic of China

+86 10 5236-2498

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

 

 

 

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

 

 

Copies to:

 

Z. Julie Gao, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

c/o 42/F, Edinburgh Tower, The Landmark

15 Queen’s Road

Central, Hong Kong

+852 3740-4700

 

Chris K.H. Lin, Esq.

Simpson Thacher & Bartlett LLP

c/o 35th Floor, ICBC Tower

3 Garden Road

Central, Hong Kong

+852 2514-7600

 

 

Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, 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, please 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.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Proposed maximum aggregate

offering price(2)(3)

 

Amount of

registration fee

Ordinary Shares, par value US$0.0001 per share(1)

  $               $            

 

 

(1) American depositary shares issuable upon deposit of ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-            ). Each American depositary share represents              ordinary shares.
(2) Includes ordinary shares that are issuable upon the exercise of the underwriters’ over-allotment option. Also includes ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public. These ordinary shares are not being registered for the purpose of sales outside the United States.
(3) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933.

 

 

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 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued                 , 2015

American Depositary Shares

 

LOGO

Yirendai Ltd.

Representing                  Ordinary Shares

 

 

This is an initial public offering of American depositary shares, or ADSs, of Yirendai Ltd., or Yirendai. Yirendai is offering              ADSs. [The selling shareholders identified in this prospectus are offering an additional              ADSs.] Each ADS represents                  of our ordinary shares, par value $0.0001 per share. [We will not receive any proceeds from the ADSs sold by the selling shareholders.]

 

 

Prior to this offering, there has been no public market for our ADSs or our ordinary shares. It is currently estimated that the initial public offering price per ADS will be between US$             and US$            . We will apply to list the ADSs on the [NASDAQ Global Market/NYSE] under the symbol “YRD.”

 

 

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements. Following the completion of this offering, we will be a “controlled company” as defined under the Corporate Governance Rules of [the NYSE/NASDAQ] because CreditEase Holdings (Cayman) Limited, or CreditEase, will hold     % of our then outstanding ordinary shares, assuming the underwriters do not exercise their over-allotment option, or     % of our then outstanding ordinary shares if the underwriters exercise their over-allotment option in full. See “Principal [and Selling] Shareholders.”

 

 

See “Risk Factors” beginning on page 13 for factors you should consider before buying the ADSs.

 

 

PRICE US$             PER ADS

 

 

 

      

Price to
Public

      

Underwriting
Discounts and
Commission

      

Proceeds
to Yirendai

      

[Proceeds,
before
expenses, to
the selling
shareholders]

 

Per ADS

       $                          $                          $                          $                  

Total

       $                           $                          $                           $                  

Yirendai [and the selling shareholder] has granted the underwriters an option to purchase up to an additional              ADSs to cover over-allotments.

The United States Securities and Exchange Commission and state regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ADSs to purchasers in New York, New York on                     , 2015.

 

 

 

MORGAN STANLEY   CREDIT SUISSE   CHINA RENAISSANCE

                    , 2015.


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TABLE OF CONTENTS

     Page  

Prospectus Summary

     1   

Risk Factors

     13   

Special Note Regarding Forward-Looking Statements

     58   

Use of Proceeds

     59   

Dividend Policy

     60   

Capitalization

     61   

Dilution

     62   

Enforceability of Civil Liabilities

     64   

Corporate History and Structure

     66   

Our Relationship with CreditEase

     70   

Selected Consolidated Financial Data

     74   

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

     75   

Industry

     100   

Business

     103   

Regulation

     126   

Management

     136   

Principal [and Selling] Shareholders

     142   

Related Party Transactions

     144   

Description of Share Capital

     146   

Description of American Depositary Shares

     156   

Shares Eligible for Future Sales

     167   

Taxation

     169   

Underwriting

     176   

Expenses Related to This Offering

     185   

Legal Matters

     186   

Experts

     187   

Where You Can Find Additional Information

     188   

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the ADSs offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about, and observe any restrictions relating to, the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the United States.

Until            , 2015 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to buy our ADSs. This prospectus contains information from a report commissioned by us and prepared in April 2015 by iResearch, an independent market research firm, to provide information on the online consumer finance marketplace industry in China.

Our Mission

Our mission is to provide consumers in China with easy access to affordable credit and investors with attractive investment opportunities through our online marketplace.

Our Business

We are China’s largest online consumer finance marketplace connecting investors and individual borrowers as measured by transaction value in 2014, according to iResearch. We facilitated over RMB4,113.1 million (US$663.5 million) in loans from our inception in March 2012 through March 31, 2015.

Our online platform automates key aspects of our operations and enables us to efficiently match borrowers with investors and execute loan transactions. Leveraging the extensive experience of our parent company, CreditEase, a large diversified financial services company which began operations in 2006, we provide an effective solution to address largely underserved investor and individual borrower demand in China. Our borrowers and investors come from a variety of channels, including online sources, such as the internet and our mobile applications, as well as offline sources, such as referrals from CreditEase’s on-the-ground sales network. In 2014 and the first quarter of 2015, we facilitated over RMB550.8 million (US$88.9 million) and RMB464.6 million (US$74.9 million) in loans through our mobile applications, respectively, representing 24.7% and 28.7% of the total amount of loans facilitated through our marketplace in the respective periods.

Between 2014 and 2019, China’s unsecured consumer finance market is forecasted to grow at a compound annual growth rate, or CAGR, of 25.7% from an estimated RMB3.6 trillion to RMB11.4 trillion (US$1.8 trillion) in terms of outstanding loan balance, according to iResearch. As we continue to expand our business, we believe that we will be well positioned to capture the opportunities presented by this growing market.

We currently target prime borrowers, comprising credit card holders with salary income. We strategically focus on prime borrowers as we believe members of this group tend to be more creditworthy and more receptive to internet finance solutions. In the future, we will expand to serve new borrower groups beyond prime borrowers, enabling us to capture the opportunities presented by China’s growing unsecured consumer finance market. Our online marketplace offers qualified borrowers who successfully complete our online application and meet our borrower requirements quick and convenient access to affordable credit at competitive prices. All of the loans facilitated through our marketplace feature fixed interest rates. To provide a transparent marketplace, the interest rates, service fees and other charges are all clearly disclosed to borrowers upfront.

Our online marketplace provides investors with attractive risk-adjusted returns from a quality asset class with investment thresholds as low as RMB100 (US$16.1). Investors have the option to individually select specific loans to invest in or to use our automated investing tool to identify and select loans on the basis of a targeted return. We also offer investors credit enhancement service in the form of a risk reserve fund and provide

 

 

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a liquid secondary market for investors. We currently conduct our business operations exclusively in China, and our online consumer finance marketplace does not facilitate investments by investors located in the United States.

We believe we have developed an industry leading risk management system using our proprietary credit decisioning and fraud detection modules. We accumulate data from our expanding borrower base and CreditEase’s extensive database to continually enhance the sophistication and reliability of our risk management system. Our proprietary risk management system enables us to assess the creditworthiness of borrowers more effectively in a market where reliable credit scores and borrower databases are still at an early stage of development. This system also enables us to appropriately price the risks associated with borrowers and offer quality loan investment opportunities to investors.

We generate revenues primarily from fees charged for our services in matching investors with individual borrowers and for other services we provide over the life of a loan. Our revenues include transaction fees, service fees and other revenues, with the majority of our historical revenues coming from transaction fees. We serve as an information intermediary, and do not assume credit risk or use our own capital to invest in loans facilitated through our marketplace.

We have experienced significant growth since we launched our marketplace in March 2012. Our total net revenues increased from US$3.1 million in 2013 to US$31.9 million in 2014, and increased from US$2.1 million for the three months ended March 31, 2014 to US$35.1 million for the three months ended March 31, 2015. We had net losses of US$8.3 million and US$4.5 million in 2013 and 2014, respectively. For the three months ended March 31, 2015, we had net income of US$7.6 million, compared to a net loss of US$3.7 million for the three months ended March 31, 2014.

Our Industry

Consumption in China has experienced rapid growth as a result of China’s economic development and rising consumption power of Chinese consumers. Despite growing consumption levels, consumption in China is underfinanced. According to iResearch, China’s consumption loan balance to GDP ratio was merely 22.8% in 2013, compared to 82.9% for the United States during the same year, suggesting significant growth potential for China’s consumer finance market. Consumption in China is underfinanced primarily because loans from traditional financial institutions are not easily accessible. China’s consumption loan balance is estimated to have reached RMB15.9 trillion (US$2.6 trillion) by the end of 2014, and is expected to further grow at a CAGR of 18.6% to RMB37.4 trillion by the end of 2019, according to iResearch.

The consumer finance market consists of secured consumption loans such as car loans and housing mortgage, and unsecured consumption loans such as credit cards and other unsecured loans from banks and consumer financing companies. According to iResearch, China’s unsecured consumption loan balance is estimated to have reached RMB3.6 trillion (US$580.7 billion) by the end of 2014, and is expected to further grow at a CAGR of 25.7% to RMB11.4 trillion by the end of 2019.

China’s rapidly growing consumption levels and relatively limited consumer finance options have created opportunities for marketplaces that connect borrowers and investors. According to iResearch, transaction values for marketplaces that focus on consumption loans, which we refer to as consumer finance marketplaces, are expected to grow from RMB12.7 billion (US$2.0 billion) in 2014 to RMB521.4 billion in 2019, representing a CAGR of 110.1%. In particular, within this segment, pure online marketplaces that focus on consumption loans to individuals, or online consumer finance marketplaces, show the strongest growth potential. According to iResearch, transaction values through online consumer finance marketplaces reached RMB4.6 billion (US$742.1 million) in 2014, and are expected to further grow at a CAGR of 122.2% to RMB247.6 billion in 2019.

 

 

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Competitive Strengths

We believe the following competitive strengths contribute to our success and differentiate us from our competitors:

 

    China’s leading online consumer finance marketplace connecting investors and individual borrowers;

 

    Superior user experience;

 

    Proprietary risk management system;

 

    Powerful network effects;

 

    Scalable and robust technology platform; and

 

    Visionary founder and experienced management team.

Our Strategies

We intend to achieve our mission by pursing the following strategies:

 

    continue to define industry best practices in China;

 

    broaden our borrower base;

 

    expand our investor base;

 

    continue to enhance our risk management capabilities;

 

    aggressively execute our mobile strategy;

 

    continue to invest in our technology platform; and

 

    cultivate a vibrant consumer lending ecosystem.

Our Challenges

Our ability to achieve our goal and execute our strategies is subject to risks and uncertainties, including those relating to our ability to:

 

    attract and retain borrowers and investors on our marketplace;

 

    introduce new loan products and platform enhancements that achieve sufficient market acceptance;

 

    effectively evaluate a borrower’s credit profile and maintain a low default rate;

 

    compete effectively;

 

    acquire users in an effective and cost-efficient way;

 

    promote and maintain our brand or reputation; and

 

    establish successful strategic relationships with partners.

In addition, we face risks and uncertainties related to our corporate structure and regulatory environment in China, including:

 

    uncertainties associated with the interpretation and application of PRC regulations and policies, including those relating to the peer-to-peer lending service industry in China;

 

    risks associated with our control over Heng Cheng, our consolidated variable interest entity in China, which is based on contractual arrangements rather than equity ownership;

 

 

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    uncertainties associated with the enactment timetable, interpretation and implementation of the draft PRC Foreign investment law, including how it may impact the viability of our corporate structure, corporate governance and business operations; and

 

    risks related to our ability to use the proceeds of this offering to make additional capital contributions or loans to our PRC subsidiary as a result of PRC regulations and governmental control of currency conversion.

Please see “Risk Factors” and other information included in this prospectus for a discussion of these and other risks and uncertainties that we face.

Corporate History and Structure

We commenced our online consumer finance marketplace business in March 2012 as a business unit under our parent company, CreditEase Holdings (Cayman) Limited, or CreditEase, which will remain our parent company and controlling shareholder after this offering. CreditEase incorporated Yirendai Ltd. in the Cayman Islands to be our holding company in September 2014. Yirendai Ltd. then established a wholly owned subsidiary in Hong Kong, Yirendai Hong Kong Limited, or Yirendai HK, in October 2014, and Yirendai HK further established Yi Ren Heng Ye Technology Development (Beijing) Co., Ltd., or Heng Ye, our wholly owned subsidiary in China, in January 2015.

Heng Cheng Technology Development (Beijing) Co., Ltd., or Heng Cheng, was established in China in September 2014. Mr. Ning Tang, Mr. Fanshun Kong and Ms. Yan Tian are the shareholders of Heng Cheng designated by CreditEase, owning 40%, 30% and 30% of the equity interests in Heng Cheng, respectively, as of the date of this prospectus. We entered into a series of contractual arrangements with Heng Cheng and its shareholders in February 2015. These contractual arrangements allow us to:

 

    exercise effective control over Heng Cheng;

 

    receive substantially all of the economic benefits of Heng Cheng; and

 

    have an exclusive option to purchase all or part of the equity interests in Heng Cheng when and to the extent permitted by PRC law.

As a result of these contractual arrangements, we have become the primary beneficiary of Heng Cheng designated by CreditEase, and we treat Heng Cheng as our variable interest entity under U.S. GAAP. We have consolidated the financial results of Heng Cheng in our consolidated financial statements in accordance with U.S. GAAP.

As a result of restructuring by CreditEase, we currently conduct our online consumer finance marketplace business in China through Heng Ye and our consolidated variable interest entity, Heng Cheng. Heng Cheng operates our website www.yirendai.com and has an ICP license as an internet information provider.

 

 

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The following diagram illustrates our corporate structure, including our subsidiaries and consolidated variable interest entity, immediately upon the completion of this offering, assuming the underwriters do not exercise their over-allotment option:

 

LOGO

 

LOGO         Equity interest

LOGO         Contractual arrangements

 

(1) The shareholders of Heng Cheng are Ning Tang, Fanshun Kong and Yan Tian, owning 40%, 30% and 30% of Heng Cheng’s equity interest, respectively. Mr. Ning Tang is our executive chairman, Mr. Fanshun Kong is a non-executive PRC employee of CreditEase, and Ms. Yan Tian is a third-party individual designated by CreditEase.

Our Relationship with CreditEase

We are a wholly-owned subsidiary of CreditEase as of the date of this prospectus. Upon the completion of this offering, CreditEase will remain our parent company and controlling shareholder, with a shareholding of         % of our then outstanding ordinary shares assuming the underwriters do not exercise their over-allotment option. Prior to the establishment of Yirendai Ltd., our business was carried out by various subsidiaries and variable interest entities of CreditEase. We completed our carve-out from CreditEase in the first quarter of 2015, and all of our online consumer finance marketplace business is carried out by our own subsidiaries and consolidated variable interest entity.

In the past, CreditEase provided us with origination and servicing, financial, administrative, sales and marketing, risk management, human resources and legal services, as well as the services of a number of its executives and employees, the costs of which were allocated to us using a proportional cost allocation method and based on headcount or transaction volume for the provision of services attributable to us. Although we intend to set up support systems of our own, we expect CreditEase to continue to provide certain support services during a transitional period after we become a stand-alone public company.

 

 

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Prior to the completion of this offering, we plan to enter into a series of agreements with CreditEase with respect to business cooperation and various ongoing relationships between us. Pursuant to these agreements, CreditEase will provide us long-term services such as borrower and investor acquisition, collection and technical support. We also expect to have an arrangement with CreditEase regarding the sharing of data and information and certain mutual intellectual property licenses owned by CreditEase and us. In addition, CreditEase will continue to provide us certain supports, such as financial, administrative, human resources and legal services, during a transitional period. See “Our Relationship with CreditEase” and “Risk Factors — Risks Related to Our Carve-out from CreditEase and Our Relationship with CreditEase.”

Corporate Information

Our principal executive offices are located at 4/F, Building 2A, No. 6 Lang Jia Yuan, Chaoyang District, Beijing, People’s Republic of China. Our telephone number at this address is +86 10 5236-2498. Our registered office in the Cayman Islands is located at the offices of Sertus Incorporations (Cayman) Limited, Sertus Chambers, P.O. Box 2547, Cassia Court, Camana Bay, Grand Cayman, Cayman Islands.

Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our main website is www.yirendai.com. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is                     , located at                             .

Implications of Being an Emerging Growth Company

As a company with less than US$1.0 billion in revenue for the last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or 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, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We will remain an emerging growth company until the earliest of (a) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.0 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the previous three year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

 

 

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Conventions that Apply to this Prospectus

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

 

    “ADSs” refers to our American depositary shares, each of which represents              ordinary shares;

 

    “APR” or “annual percentage rate” refers to the annual rate that is charged to borrowers, including a fixed interest rate and a transaction fee rate, expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan.

 

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

 

    “CreditEase” refers to CreditEase Holdings (Cayman) Limited, our parent company and controlling shareholder;

 

    “M3+ Net Charge Off Rate”, with respect to loans facilitated during a specified time period, which we refer to as a vintage, refers to the difference between (i) the total outstanding balance of loans that become over three months delinquent during a specified period and (ii) the total amount of payments collected in the same period with respect to all loans that have ever become over three months delinquent, divided by (iii) the total initial balance of the loans facilitated in such vintage.

 

    “ordinary shares” prior to the completion of this offering refers to our ordinary shares of par value US$0.0001 per share, and upon and after the completion of this offering are to our ordinary shares, each of par value US$0.0001 per share;

 

    “Peer-to-peer lending service providers” refers to marketplaces connecting borrowers and investors;

 

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

 

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

 

    “Yirendai,” “we,” “us,” “our company” and “our” refer to Yirendai Ltd., its subsidiaries and its consolidated variable interest entity.

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

We use U.S. dollars as reporting currency in our financial statements and in this prospectus. Monetary assets and liabilities denominated in Renminbi are translated into U.S. dollars at the rates of exchange as of the balance sheet date, equity accounts are translated at historical exchange rates, and revenues, expenses, gains and losses are translated using the average rate for the period. In other parts of this prospectus, any Renminbi denominated amounts are accompanied by translations. With respect to amounts not recorded in our consolidated financial statements included elsewhere in this prospectus, all translations from Renminbi to U.S. dollars were made at RMB6.1990 to US$1.00, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board on March 31, 2015. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could 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 restricts or prohibits the conversion of Renminbi into foreign currency and foreign currency into Renminbi for certain types of transactions. On June 12, 2015, the noon buying rate set forth in the H.10 statistical release of the Federal Reserve Board was RMB6.2081 to US$1.00.

 

 

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The Offering

 

Offering price

We currently estimate that the initial public offering price will be between US$             and US$             per ADS.

 

ADSs offered by us

             ADSs (or              ADSs if the underwriters exercise their over-allotment option in full).

 

[ADSs offered by the selling shareholders

             ADSs (or              ADSs if the underwriters exercise their over-allotment option in full).]

 

ADSs outstanding immediately after this offering

             ADSs (or              ADSs if the underwriters exercise their over-allotment option in full)

 

Ordinary shares outstanding immediately after this offering

             ordinary shares, (or              ordinary shares if the underwriters exercise their over-allotment option in full).

 

The ADSs

Each ADS represents              ordinary shares of par value US$0.0001 per share.

The depositary will hold ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement among us, the depositary and holders and                                          beneficial owners of ADSs from time to time.

We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our ordinary shares after deducting its fees and expenses in accordance with the terms set forth in the deposit agreement.

You may surrender your ADSs to the depositary in exchange for ordinary shares. The depositary will charge you fees for any exchange.

We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended.

To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

Over-allotment option

We [and the selling shareholders] have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to an aggregate of              additional ADSs.

 

 

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Use of proceeds

We expect that we will receive net proceeds of approximately US$             million from this offering, assuming an initial public offering price of US$             per ADS, which is the midpoint of the estimated range of the initial public offering price, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We plan to use the net proceeds of this offering primarily for general corporate purposes, which may include investment in product development, sales and marketing activities, technology infrastructure, capital expenditures, improvement of corporate facilities and other general and administrative matters. We may also use a portion of these proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments. See “Use of Proceeds” for more information.

 

  [We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.]

 

Lock-up

[We, our directors, executive officers and all of our existing shareholders] have agreed with the underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting.”

 

[Reserved ADSs

At our request, the underwriters have reserved for sale, at the initial public offering price, up to an aggregate of              ADSs offered in this offering to some of our directors, officers, employees, business associates and related persons through a directed share program.]

 

Listing

We intend to apply to have the ADSs listed on the [NASDAQ Global Market/NYSE] under the symbol “YRD.” Our ADSs and shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of the Depository Trust Company on             , 2015.

Depositary

 

 

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Summary Consolidated Financial and Operating Data

The following summary consolidated statements of operations for the years ended December 31, 2013 and December 31, 2014, and summary consolidated balance sheet as of December 31, 2013 and December 31, 2014 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our audited consolidated financial statements are prepared and presented in accordance with U.S. GAAP. The following summary consolidated statement of operations for the three months ended March 31, 2014 and 2015 and the summary consolidated balance sheet as of March 31, 2015 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. Our historical results do not necessarily indicate results expected for any future periods. You should read this Summary Consolidated Financial and 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.

 

     For the Year Ended December 31,      For the Three Months
Ended March 31,
 
     2013     2014      2014      2015  
    

(in US$ thousands, except for share, per share and per ADS data,
and percentage)

 

Summary Consolidated Statements of Operations:

          

Net revenue:

          

Transaction fees

     3,045        31,317         2,030         33,808   

Service fees

     25        405         23         1,215   

Others

     61        171         26         112   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total net revenues

  3,131      31,893      2,079      35,135   
  

 

 

   

 

 

    

 

 

    

 

 

 

Operating costs and expenses:

Sales and marketing

  5,220      22,354      3,358      17,666   

Origination and servicing

  1,255      3,541      662      2,044   

General and administrative

  4,998      10,490      1,766      5,214   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total operating costs and expenses

  (11,473   (36,385   (5,786   (24,924
  

 

 

   

 

 

    

 

 

    

 

 

 

Interest income

  —        —        —        11   
  

 

 

   

 

 

    

 

 

    

 

 

 

(Loss)/income before provision for income taxes

  (8,342   (4,492   (3,707   10,222   
  

 

 

   

 

 

    

 

 

    

 

 

 

Income tax expense

  —        (5   —        (2,580
  

 

 

   

 

 

    

 

 

    

 

 

 

Net (loss)/income

  (8,342   (4,497   (3,707   7,642   
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average number of ordinary shares used in per share calculations:

Basic and diluted

  10,000      10,000      10,000      10,000   

Net (loss)/income per ordinary share

Basic and diluted

  (834   (450   (371   764   

Net (loss)/income per ADS(1)

Basic

Diluted

Non-GAAP Financial Measures:(2)

Contribution

  (3,344   5,998       (1,941)       15,425   

Contribution margin

  (106.8 %)    18.8%      (91.4%)      43.9%   

 

 

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  (1) Each ADS represents             ordinary shares.
  (2) See “—Non-GAAP Financial Measures.”

 

     As of December 31,      As of March 31,  
     2013      2014      2015  
     (in US$ thousands)  

Summary Consolidated Balance Sheet:

        

Accounts receivable

     3,077         25,971         22,721   

Total assets

     4,933         64,825         110,644   

Total liabilities

     1,775         28,813         66,922   

Total equity

     3,158         36,012         43,722   

The following table presents our summary operating data for the periods indicated:

 

Summary Operating Data:    For the Year Ended December 31,      For the Three Months Ended March
31,
 
     2013      2014      2014      2015  
     RMB      RMB      US$      RMB      RMB      US$  
     (in thousands)  

Amount of loans facilitated

     258,322         2,228,562         359,179         169,728         1,620,770         261,457   

Loans generated from online channels

     98,512         896,003         144,409         44,611        
612,839
  
     98,861   

Loans generated from offline channels

     159,810         1,332,559         214,770         125,117         1,007,931         162,596   

 

     For the Year Ended December 31,      For the Three
Months Ended
March 31,
 
               2013                          2014                    2014          2015  

Number of borrowers

     3,549         39,344         2,487         27,581   

Number of investors

     5,617         34,527         4,971         25,124   

Non-GAAP Financial Measures

In evaluating our business, we consider and use two non-GAAP financial measures, contribution and contribution margin, as supplemental measures to review and assess our operating performance. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP. We calculate contribution as net (loss)/income, excluding general and administrative expense, interest income and income tax expense. We calculate contribution margin by dividing contribution by total net revenues.

We present these non-GAAP financial measures because they are used by our management to evaluate our core operating performance and trends. Contribution and contribution margin have varied from period to period and have generally increased over time. Factors that affect our contribution and contribution margin include revenue mix, variable sales and marketing expenses, and origination and servicing expenses. These non-GAAP financial measures are not defined under U.S. GAAP and are not presented in accordance with U.S. GAAP. The non-GAAP financial measures have limitations as analytical tools.

One of the key limitations of using contribution and contribution margin is that it does not reflect all items of income and expense that affect our operations. General and administrative expense and income tax expense

 

 

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(benefit) have been and will continue to be incurred in our business and are not reflected in the presentation of contribution and contribution margin. Further, other companies, including peer companies in our industry, may calculate these non-GAAP measures differently, which may reduce their usefulness as a comparative measure.

We compensate for these limitations by reconciling the non-GAAP financial measure to the nearest U.S. GAAP performance measure, all of which should be considered when evaluating our performance. We encourage you to review our financial information in its entirety and not rely on a single financial measure.

The following table reconciles our contribution in 2013 and 2014 and the three months ended March 31, 2014 and 2015 to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP, which is net (loss)/income:

 

     For the Year
Ended
December 31,
    For the Three
Months Ended
March 31,
 
     2013     2014     2014     2015  
    
 
(in US$ thousands, except for
percentage)
  
  

Reconciliation of Net (Loss)/Income to Contribution:

        

Net (loss)/income

     (8,342     (4,497     (3,707     7,642   

Interest income

     —          —          —          (11

Income tax expense

     —          5        —          2,580   

General and administrative expenses

     4,998        10,490        1,766        5,214   
  

 

 

   

 

 

   

 

 

   

 

 

 

Contribution

  (3,344   5,998      (1,941   15,425   
  

 

 

   

 

 

   

 

 

   

 

 

 
Total net revenues   3,131      31,893      2,079      35,135   

Contribution margin

  (106.8 %)    18.8   (93.4 )%    43.9

 

 

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RISK FACTORS

An investment in our ADSs involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material and adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Risks Related to Our Business

We have a limited operating history in a new and evolving market, which makes it difficult to evaluate our future prospects.

The market for China’s online consumer finance marketplaces is new and may not develop as expected. The regulatory framework for this market is also evolving and may remain uncertain for the foreseeable future. Potential borrowers and investors may not be familiar with this market and may have difficulty distinguishing our services from those of our competitors. Convincing potential new borrowers and investors of the value of our services is critical to increasing the volume of loan transactions facilitated through our marketplace and to the success of our business.

We launched our online marketplace in March 2012 and our limited operating history makes it difficult to effectively assess our future prospects. You should consider our business and prospects in light of the risks and challenges we encounter or may encounter in this developing and rapidly evolving market. These risks and challenges include our ability to, among other things:

 

    navigate an evolving regulatory environment;

 

    expand the base of borrowers and investors served on our marketplace;

 

    broaden our loan product offerings;

 

    enhance our risk management capabilities;

 

    improve our operational efficiency;

 

    cultivate a vibrant consumer finance ecosystem;

 

    maintain the security of our platform and the confidentiality of the information provided and utilized across our platform;

 

    attract, retain and motivate talented employees; and

 

    defend ourselves against litigation, regulatory, intellectual property, privacy or other claims.

If we fail to educate potential borrowers and investors about the value of our platform and services, if the market for our marketplace does not develop as we expect, or if we fail to address the needs of our target market, or other risks and challenges, our business and results of operations will be harmed.

If we are unable to maintain or increase the volume of loan transactions facilitated through our marketplace or if we are unable to retain existing borrowers or investors or attract new borrowers or investors, our business and results of operations will be adversely affected.

The volume of loan transactions facilitated through our marketplace has grown rapidly since our inception. The total amount of loans facilitated through our marketplace was RMB2,228.6 million (US$359.2 million) in 2014, which increased substantially from RMB258.3 million in 2013. In the first quarter of 2015, the total amount of loans facilitated through our marketplace was RMB1,620.8 million (US$261.5 million), compared with RMB169.7 million in the first quarter of 2014. To maintain the high growth momentum of our marketplace, we must continuously increase the volume of loan transactions by retaining current participants and attracting more users whose needs can be met on our platform. We intend to continue to dedicate significant resources to

 

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our user acquisition efforts, particularly as we continue to grow our marketplace and introduce new loan products. We utilize both online channels, such as search engine marketing, search engine optimization and partnerships with internet companies, as well as CreditEase’s on-the-ground sales network for user acquisition. In 2013, 2014 and the first quarter of 2015, 54.2%, 48.1% and 45.3% of our borrowers were acquired through CreditEase, respectively. If there are insufficient qualified loan requests, investors may be unable to deploy their capital in a timely or efficient manner and may seek other investment opportunities. If there are insufficient investor commitments, borrowers may be unable to obtain capital through our marketplace and may turn to other sources for their borrowing needs. The overall transaction volume may be affected by several factors, including our brand recognition and reputation, the interest rates offered to borrowers and investors relative to market rates, the effectiveness of our risk control, the repayment rate of borrowers on our marketplace, the efficiency of our platform, the macroeconomic environment and other factors. In addition, although we have entered into a cooperation framework agreement with CreditEase, pursuant to which CreditEase will provide us offline user acquisition services, we cannot assure you that we will receive sufficient support from CreditEase after we become a stand-alone company. If any of our current user acquisition channels become less effective, if we are unable to continue to use any of these channels or if we are not successful in using new channels, we may not be able to attract new borrowers and investors in a cost-effective manner or convert potential borrowers and investors into active borrowers and investors, and may even lose our existing borrowers and investors to our competitors. If we are unable to attract qualified borrowers and sufficient investor commitments or if borrowers and investors do not continue to participate in our marketplace at the current rates, we might be unable to increase our loan transaction volume and revenues as we expect, and our business and results of operations may be adversely affected.

The laws and regulations governing the peer-to-peer lending service industry in China are developing and evolving and subject to changes. If our practice is deemed to violate any PRC laws or regulations, our business, financial conditions and results of operations would be materially and adversely affected.

Due to the relatively short history of the peer-to-peer lending service industry in China, the PRC government has not adopted a clear regulatory framework governing our industry, although PRC governmental officials from a number of agencies and departments have recently voiced support for the development of the online peer-to-peer lending service industry in China, and expressed the need for strengthening the regulation and supervision of this industry. Our platform serves as an information intermediary between borrowers and investors, and we do not use our own capital to invest in loans facilitated through our marketplace. We have taken measures to ensure that we are compliant with the existing laws, regulations and governmental policies relating to our industry, including but not limited to those prohibiting illegal fund-raising, forming capital pool or providing guarantee to investors, as well as regulatory principles raised by the China Banking Regulatory Commission, or the CBRC. However, due to the lack of detailed rules and guidance and the fact that laws and regulations are evolving in this newly emerging industry, we cannot guarantee that our practice would not be deemed to violate any existing or future laws and regulations. In particular, we cannot rule out the possibility that some of our services provided to investors such as the automated investing tool might be viewed as having the effect of forming a capital pool, or our credit enhancement arrangement might be viewed as similar to providing a form of guarantee. On a public forum held on September 27, 2014, a senior officer of the CBRC mentioned several requirements that the CBRC is contemplating for future regulation of the peer-to-peer lending service industry, which include, among others, that a peer-to-peer lending service provider (i) is neither a credit intermediary bearing credit risk nor a transaction platform, but an information intermediary between lenders and borrowers, (ii) should not hold investors’ funds or set up any capital pool, and (iii) must not provide guarantees for lenders in relation to the loan principal or interests, or bear any system risk or liquidity risk. Our automated investing tool automatically allocates committed funds from multiple investors among multiple approved borrowers, which goes beyond the simple one-to-one matching between investors and borrowers and could be viewed as violating some of these requirements. In addition, if our automated investing tool fails to match committed investors with approved borrowers in a timely manner, we might be deemed to hold investors’ funds and form a capital pool incidentally. Under our credit enhancement arrangement, if a loan is delinquent for a certain period of time, we may withdraw a sum from the risk reserve fund to repay investors the principal and

 

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accrued interest for the defaulted loan unless the risk reserve fund is depleted. Although the purpose of the credit enhancement service is not to provide investors with the guaranteed return of loan principals and interests, we cannot rule out the possibility that the risk reserve fund model might be viewed by the PRC regulatory bodies as providing, to a certain extent, a form of guarantee. As of the date of this prospectus, we have not been subject to any material fines or other penalties under any PRC laws or regulations including those governing the peer-to-peer lending service industry in China. However, if our past or current practice, including our automated investing tool or the risk enhancement arrangement, is deemed to violate any applicable PRC laws and regulations in the future, we may face fines and, in extreme cases, criminal prosecutions and may be required to change our business model. If such situations occur, our business, financial condition and prospects would be materially and adversely affected. In addition, given the evolving regulatory environment in which we operate, we cannot rule out the possibility that the PRC government will institute a licensing regime covering our industry. If such a licensing regime were introduced, we cannot assure you that we would be able to obtain any newly required license in a timely manner, or at all, which could materially and adversely affect our business and impede our ability to continue our operations.

If new loan products and platform enhancements do not achieve sufficient market acceptance, our financial results and competitive position will be harmed.

We incur expenses and expend resources upfront to develop, acquire and market new loan products and platform enhancements that incorporate additional features, improve functionality or otherwise make our platform more desirable to borrowers and investors. For example, as part of our efforts to introduce dynamic risk-based pricing, we started to facilitate Grade B and Grade D loans in the fourth quarter of 2014 and Grade C loans in the first quarter of 2015. For a more detailed description of the four pricing grades we currently offer, please see “Business—Risk Management—Proprietary Credit Scoring Model and Loan Qualification System.” New loan products or platform enhancements must achieve high levels of market acceptance in order for us to recoup our investment in developing, acquiring and bringing them to market.

Any recently launched or new loan products and changes to our platform could fail to attain sufficient market acceptance for many reasons, including:

 

    our failure to predict market demand accurately and supply loan products that meet this demand in a timely fashion;

 

    borrowers and investors using our platform may not like, find useful or agree with any changes;

 

    defects, errors or failures on our platform;

 

    negative publicity about our loan products or our platform’s performance or effectiveness;

 

    views taken by regulatory authorities that the new products or platform changes do not comply with PRC laws, rules or regulations applicable to us; and

 

    the introduction or anticipated introduction of competing products by our competitors.

If our new loan products or platform enhancements do not achieve adequate acceptance in the market, our competitive position, results of operations and financial condition could be harmed.

If we are unable to maintain a low default rate of loans facilitated by our platform, our business and results of operations may be materially and adversely affected.

Our ability to attract borrowers and investors to, and build trust in, our marketplace is significantly dependent on our ability to effectively evaluate a borrower’s credit profile and maintain a low default rate. To conduct this evaluation, we have employed a series of procedures and developed a proprietary credit assessment

 

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and decisioning model. If we are unable to effectively and accurately assess the credit profiles of our borrowers, we may be either unable to offer attractive fee rates to borrowers and returns to investors, or unable to maintain a low default rate of loans facilitated by our platform. In addition, once a loan application is approved, we do not further monitor changes in the borrower’s credit profile. If the borrower’s financial condition deteriorates, we may not be able to take measures to prevent default on the part of the borrower and thereby maintain a low default rate for loans facilitated by our platform. Because investment in loans on our marketplace involves inherent risks and return, including the principal of the investment, is not guaranteed, we are unable to completely eliminate borrowers’ default despite various preventive measures we have taken or will take. We currently target prime borrowers, comprising credit card holders with salary income. If we expand to serve new borrower groups beyond prime borrowers in the future, we may find it difficult or unable to maintain a low default rate of loans facilitated through our marketplace. If widespread defaults were to occur, investors may lose confidence in our marketplace and our business and results of operations may be materially and adversely affected. As of March 31, 2015, among all the loans facilitated through our online marketplace, the loans facilitated in 2012 presented the highest cumulative M3+ Net Charge Off Rate, which is approximately 9.9%. For the historical lifetime cumulative M3+ Net Charge Off Rates for all loan products facilitated through our platform, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Factors Affecting Our Results of Operations—Effectiveness of Risk Management.”

We have limited experience operating our risk reserve fund. If it is under- or over-funded, our financial results and competitive position may be harmed.

We have limited experience operating our risk reserve fund. In January 2015, we launched our new credit enhancement service in the form of a risk reserve fund. Under the current arrangement, we collect from borrowers an amount equivalent to a certain percentage, currently at 6%, of all loans facilitated through our marketplace and set aside such amount in an interest-bearing custody account. In the event that a loan defaults, we withdraw funds from the custody account to repay investors the principal and accrued interest for the defaulted loan unless the risk reserve fund is depleted. The actual amount to be set aside continuously monitored and calculated based on an analysis of both our historical charge-off rates and a charge-off forecast for our target borrower group. See “Business—Risk Management—Credit Enhancement.”

Since we commenced our online consumer finance business only in March 2012, we lack information regarding the default rates on some of our longer term loans that are currently nearing maturity. In addition, given our limited operating history, we have limited information on historical charge-off rates, and we may not be able to conduct an accurate charge-off forecast for our target borrower group. Given these challenges, it is possible that we will under- or over-fund our risk reserve fund compared to the prevailing market practice. If we under-fund our risk reserve fund, this may result in negative investor sentiment among investors who are not repaid in full, potentially hindering our ability to retain existing investors as well as to attract new investors. Conversely, if we over-fund our risk reserve fund, this will reduce the amount of our working capital, as we expect all funds set aside for the risk reserve to be recorded as restricted cash which cannot be used to fund our operations, and cause us to lose business opportunities. Should any of the foregoing occur, our competitive position, as well our results of operations and financial condition, could be materially and adversely affected.

If we do not compete effectively our results of operations could be harmed.

The online consumer finance marketplace industry in China is competitive and evolving. We compete with financial products and companies that attract borrowers, investors or both. With respect to borrowers, we primarily compete with traditional financial institutions, such as consumer finance business units in commercial banks, credit card issuers and other consumer finance companies. With respect to investors, we primarily compete with other investment vehicles and asset classes, such as equities, bonds, investment trust products, bank savings accounts, real estate and alternative asset classes. We also compete with a large number of other consumer finance marketplaces.

 

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Our competitors operate with different business models, have different cost structures or participate selectively in different market segments. They may ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our current and potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their platforms. Our competitors may also have longer operating histories, more extensive borrower or investor bases, greater brand recognition and brand loyalty and broader partner relationships than us. Additionally, a current or potential competitor may acquire one or more of our existing competitors or form a strategic alliance with one or more of our competitors. Our competitors may be better at developing new products, responding faster to new technologies and undertaking more extensive marketing campaigns. If we are unable to compete with such companies and meet the need for innovation in our industry, the demand for our marketplace could stagnate or substantially decline, we could experience reduced revenues or our marketplace could fail to achieve or maintain more widespread market acceptance, any of which could harm our business and results of operations.

If we fail to promote and maintain our brand in an effective and cost-efficient way, our business and results of operations may be harmed.

We believe that developing and maintaining awareness of our brand effectively is critical to attracting new and retaining existing borrowers and investors to our marketplace. Successful promotion of our brand and our ability to attract qualified borrowers and sufficient investors depend largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our marketplace. Our efforts to build our brand have caused us to incur significant expenses, and it is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.

Credit and other information that we receive from third parties about a borrower may be inaccurate or may not accurately reflect the borrower’s creditworthiness, which may compromise the accuracy of our credit assessment.

For the purpose of credit assessment, we obtain borrower credit information from third parties, such as financial institutions and e-commerce providers, and assess applicants’ credit and assign credit scores to borrowers. A credit score assigned to a borrower may not reflect that particular borrower’s actual creditworthiness because the credit score may be based on outdated, incomplete or inaccurate consumer reporting data. Although we do not permit borrowers to hold more than one loan that has been facilitated through our platform at a time, we currently do not have a comprehensive way to determine whether borrowers have obtained loans through other consumer finance marketplaces, creating the risk whereby a borrower may borrow money through our platform in order to pay off loans to investors on other platforms. Additionally, there is a risk that, following our obtaining a borrower’s credit information, the borrower may have:

 

    become delinquent in the payment of an outstanding obligation;

 

    defaulted on a pre-existing debt obligation;

 

    taken on additional debt; or

 

    sustained other adverse financial events.

Such inaccurate or incomplete borrower credit information could compromise the accuracy of our credit assessment and adversely affect the effectiveness of our control over our default rate, which could in turn harm our reputation, and as a result our business and results of operations could be materially and adversely affected.

 

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In addition, our business of connecting investors and individual borrowers may constitute an intermediary service, and our contracts with these investors and borrowers may be deemed as intermediation contracts, under the PRC Contract Law. Under the PRC Contract Law, an intermediary may not claim for service fee and is liable for damages if it conceals any material fact intentionally or provides false information in connection with the conclusion of an intermediation contract, which results in harm to the client’s interests. See “Regulations—Regulations on Loans between Individuals.” Therefore, if we fail to provide material information to investors, or if we fail to identify false information received from borrowers or others and in turn provide such information to investors, and in either case if we are also found to be at fault, due to failure or deemed failure to exercise proper care, such as to conduct adequate information verification or employee supervision, we could be held liable for damages caused to investors as an intermediary pursuant to the PRC Contract Law. In addition, if we fail to complete our obligations under the agreements entered into with investors and borrowers, we could also be held liable for damages caused to borrowers or investors pursuant to the PRC Contract Law. On the other hand, we do not assume any liability solely on the basis of failure to correctly assign a loan grade to a particular borrower in the process of facilitating a loan transaction, as long as we do not conceal any material fact intentionally or provide false information, and are not found to be at fault otherwise. However, due to the lack of detailed regulations and guidance in the area of peer-to-peer lending services and the possibility that the PRC government authority may promulgate new laws and regulations regulating peer-to-peer lending services in the future, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations for the peer-to-peer lending service industry, and there can be no assurance that the PRC government authority will ultimately take a view that is consistent with us.

Any harm to our brand or reputation or any damage to the reputation of the online consumer finance marketplace industry may materially and adversely affect our business and results of operations.

Enhancing the recognition and reputation of our brand is critical to our business and competitiveness. Factors that are vital to this objective include but are not limited to our ability to:

 

    maintain the quality and reliability of our platform;

 

    provide borrowers and investors with a superior experience in our marketplace;

 

    enhance and improve our credit assessment and decision-making models;

 

    effectively manage and resolve borrower and investor complaints; and

 

    effectively protect personal information and privacy of borrowers and investors.

Our brand and reputation may also be negatively affected if the guarantee company providing guarantees to the loans we facilitated between August 2013 and December 2014 fails to repay the principal and accrued interest on defaulted loans pursuant to the terms of the guarantee arrangement. Any malicious or innocent negative allegation made by the media or other parties about the foregoing or other aspects of our company, including but not limited to our management, business, compliance with law, financial conditions or prospects, whether with merit or not, could severely hurt our reputation and harm our business and operating results. As the market for China’s online consumer finance marketplaces is new and the regulatory framework for this market is also evolving, negative publicity about this industry may arise from time to time. Negative publicity about China’s online consumer finance marketplace industry in general may also have a negative impact on our reputation, regardless of whether we have engaged in any inappropriate activities.

In addition, certain factors that may adversely affect our reputation are beyond our control. Negative publicity about our partners, outsourced service providers or other counterparties, such as negative publicity about their debt collection practices and any failure by them to adequately protect the information of borrowers and investors, to comply with applicable laws and regulations or to otherwise meet required quality and service standards could harm our reputation. Furthermore, any negative development in the online consumer finance marketplace industry, such as bankruptcies or failures of other consumer finance marketplaces, and especially a

 

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large number of such bankruptcies or failures, or negative perception of the industry as a whole, even if factually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established and impose a negative impact on our ability to attract new borrowers and investors. Negative developments in the online consumer finance marketplace industry, such as widespread borrower defaults, fraudulent behavior and/or the closure of other online consumer finance marketplaces, may also lead to tightened regulatory scrutiny of the sector and limit the scope of permissible business activities that may be conducted by online consumer finance marketplaces like us. If any of the foregoing takes place, our business and results of operations could be materially and adversely affected.

We have incurred net losses in the past and may continue to incur net losses in the future.

We had net losses of US$8.3 million and US$4.5 million in 2013 and 2014, respectively. We had accumulated deficit of US$10.2 million, US$14.6 million and US$7.0 million as of December 31, 2013, December 31, 2014 and March 31, 2015, respectively. Although we had net income of US$7.6 million in the first quarter of 2015, we cannot assure you that we will be able to continue to generate net income in the future. We anticipate that our operating expenses will increase in the foreseeable future as we seek to continue to grow our business, attract borrowers, investors and partners and further enhance and develop our loan products and platform. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. As a result of the foregoing, we may incur additional net losses in the future and may not be able to maintain profitability on a quarterly or annual basis.

Our reputation may be harmed if information supplied by borrowers is inaccurate, misleading or incomplete.

Borrowers supply a variety of information that is included in the loan listings on our marketplace. We do not verify all the information we receive from borrowers, and such information may be inaccurate or incomplete. For example, we often do not verify a borrower’s home ownership status or intended use of loan proceeds. Moreover, investors do not, and will not, have access to detailed financial information about borrowers. If investors invest in loans through our platform based on information supplied by borrowers that is inaccurate, misleading or incomplete, those investors may not receive their expected returns and our reputation may be harmed. Moreover, inaccurate, misleading or incomplete borrower information could also potentially subject us to liability as an intermediary under the PRC Contract Law. See “Regulations—Regulations on Loans between Individuals.”

Fraudulent activity on our marketplace could negatively impact our operating results, brand and reputation and cause the use of our loan products and services to decrease.

We are subject to the risk of fraudulent activity both on our marketplace and associated with borrowers, investors and third parties handling borrower and investor information. Our resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraud. Significant increases in fraudulent activity could negatively impact our brand and reputation, reduce the volume of loan transactions facilitated through our platform and lead us to take additional steps to reduce fraud risk, which could increase our costs. High profile fraudulent activity could even lead to regulatory intervention, and may divert our management’s attention and cause us to incur additional expenses and costs. Although we have not experienced any material business or reputational harm as a result of fraudulent activities in the past, we cannot rule out the possibility that any of the foregoing may occur causing harm to our business or reputation in the future. If any of the foregoing were to occur, our results of operations and financial conditions could be materially and adversely affected.

Successful strategic relationships with partners are important for our future success.

We anticipate that we will continue to leverage our strategic relationships with existing partners in China’s online consumer finance marketplace industry to grow our business while we will pursue new relationships with additional partners such as traditional financial institutions and merchants in more sectors. For example, in the

 

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future, we may partner with traditional financial institutions to combine the efficiency advantages of online consumer finance marketplaces with the low funding costs of traditional financial institutions. Identifying, negotiating and documenting relationships with partners requires significant time and resources as does integrating third-party data and services. Our current agreements with partners often do not prohibit them from working with our competitors or from offering competing services. Our competitors may be effective in providing incentives to our partners to favor their products or services, which may in turn reduce the volume of loans facilitated through our marketplace. Certain types of partners may devote more resources to support their own competing businesses. In addition, these partners may not perform as expected under our agreements with them, and we may have disagreements or disputes with such partners, which could adversely affect our brand and reputation. If we cannot successfully enter into and maintain effective strategic relationships with business partners, our business will be harmed.

Misconduct, errors and failure to function by our employees and third-party service providers could harm our business and reputation.

We are exposed to many types of operational risks, including the risk of misconduct and errors by our employees and third-party service providers. Our business depends on our employees and third-party service providers to interact with potential borrowers and investors, process large numbers of transactions and support the loan collection process, all of which involve the use and disclosure of personal information. We could be materially adversely affected if transactions were redirected, misappropriated or otherwise improperly executed, if personal information was disclosed to unintended recipients or if an operational breakdown or failure in the processing of transactions occurred, whether as a result of human error, purposeful sabotage or fraudulent manipulation of our operations or systems. In addition, the manner in which we store and use certain personal information and interact with borrowers and investors through our marketplace is governed by various PRC laws. It is not always possible to identify and deter misconduct or errors by employees or third-party service providers, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses. If any of our employees or third-party service providers take, convert or misuse funds, documents or data or fail to follow protocol when interacting with borrowers and investors, we could be liable for damages and subject to regulatory actions and penalties. We could also be perceived to have facilitated or participated in the illegal misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or criminal liability. In addition, we currently rely on CreditEase and in the future may continue to rely on CreditEase or other third-party service providers for loan collection services. Aggressive practices or misconduct by any of our third-party service providers, including CreditEase, in the course of collecting loans could damage our reputation.

Furthermore, as we rely on certain third-party service providers, such as third-party payment platforms, to conduct our business, if these third-party service providers failed to function properly, we could not assure your that we would be able to find an alternative in a timely and cost-efficient manner or at all. Any of these occurrences could result in our diminished ability to operate our business, potential liability to borrowers and investors, inability to attract borrowers and investors, reputational damage, regulatory intervention and financial harm, which could negatively impact our business, financial condition and results of operations.

Fluctuations in interest rates could negatively affect transaction volume.

All loans facilitated through our marketplace are issued with fixed interest rates. If interest rates rise, investors who have already committed capital may lose the opportunity to take advantage of the higher rates. If interest rates decrease after a loan is made, borrowers through our platform may prepay their loans to take advantage of the lower rates. Investors through our platform would lose the opportunity to collect the above-market interest rates payable on the prepaid loans and might delay or reduce future loan investments. As a result, fluctuations in the interest rate environment may discourage investors and borrowers from participating in our marketplace, which may adversely affect our business.

 

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A severe or prolonged downturn in the global or Chinese economy could materially and adversely affect our business and financial condition.

The global financial markets have experienced significant disruptions since 2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from the lows of 2008 and 2009 has been uneven and is facing new challenges, including the escalation of the European sovereign debt crisis from 2011 and the slowdown of the Chinese economy since 2012. It is unclear whether the Chinese economy will resume its high growth rate. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have also been concerns over unrest in Ukraine, the Middle East and Africa, which have resulted in volatility in financial and other markets. There have also been concerns about the economic effect of the tensions in the relationship between China and surrounding Asian countries. Economic conditions in China are sensitive to global economic conditions. Any prolonged slowdown in the global or Chinese economy may have a negative impact on our business, results of operations and financial condition. Any rise in China’s unemployment rate may reduce the number of borrowers on our marketplace and result in higher default rate. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.

Our quarterly results may fluctuate significantly and may not fully reflect the underlying performance of our business.

Our quarterly results of operations, including the levels of our revenues, expenses, net (loss)/income and other key metrics, may vary significantly in the future due to a variety of factors, some of which are outside of our control, and period-to-period comparisons of our operating results may not be meaningful, especially given our limited operating history. Accordingly, the results for any one quarter are not necessarily an indication of future performance. Fluctuations in quarterly results may adversely affect the price of our ADSs. Factors that may cause fluctuations in our quarterly financial results include:

 

    our ability to attract new borrowers and investors and maintain relationships with existing borrowers and investors;

 

    loan volumes and the channels through which borrowers and investors are sourced;

 

    the amount and timing of operating expenses related to acquiring borrowers and investors and the maintenance and expansion of our business, operations and infrastructure;

 

    network outages or security breaches;

 

    general economic, industry and market conditions;

 

    our emphasis on borrower and investor experience instead of near-term growth; and

 

    the timing of expenses related to the development or acquisition of technologies or businesses.

In addition, we experience seasonality in our business, reflecting seasonal fluctuations in internet usage and traditional personal consumption patterns, as our individual borrowers typically use their borrowing proceeds to finance their personal consumption needs. For example, we generally experience lower transaction value on our online consumer finance marketplace during national holidays in China, particularly during the Chinese New Year holiday season in the first quarter of each year. While our rapid growth has somewhat masked this seasonality, our results of operations could be affected by such seasonality in the future.

Failure to manage our liquidity and cash flows may materially and adversely affect our financial position and results of operations.

We generated negative cash flows from operating activities of US$11.3 million and US$36.8 million in 2013 and 2014, respectively, and positive cash flow from operating activities of US$1.8 million in the first

 

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quarter of 2015. As of December 31, 2013, December 31, 2014 and March 31, 2015, we had accounts receivable of US$3.1 million, US$26.0 million and US$22.7 million, respectively. Our accounts receivable primarily include the transaction fees receivable from borrowers. Historically, borrowers paid the transaction fees primarily on a monthly basis over the term of the loan, which has contributed to our generating negative cash flows from operating activities. In the fourth quarter of 2014, we adopted a new fee collection schedule whereby we either collect the entire amount of the transaction fee upfront upon completion of our loan facilitation services, or collect a portion of the transaction fee upfront and the rest on a monthly basis over the term of the loan. However, we cannot assure you the new fee collection schedule will improve our cash position. Inability to collect payments from customers, borrowers in particular, in a timely and sufficient manner may adversely affect our liquidity, financial condition and results of operations.

We may need additional capital, and financing may not be available on terms acceptable to us, or at all.

In 2013 and 2014, our principal sources of liquidity were advances from our parent company, CreditEase, representing operating costs and expenses paid or borne by the various entities affiliated with CreditEase on our behalf, as our online consumer finance marketplace business was carried out by various subsidiaries and variable interest entities of CreditEase as a business unit under CreditEase at the time. We completed our carve-out from CreditEase in the first quarter of 2015, and we will not have such advances from CreditEase going forward. As of March 31, 2015, we had cash and cash equivalents of US$1.8 million, compared with cash and cash equivalents of approximately US$0.2 million as of December 31, 2014. We have received capital contributions from CreditEase in the past and expect to receive additional capital contributions of approximately RMB60 million (US$9.7 million) from CreditEase in the near future. We may receive additional capital contribution in the form of equity investments or loans from CreditEase in the future. Although we believe that our anticipated cash flows from operating activities, together with the additional capital contributions we expect to receive from CreditEase, will be sufficient to meet our anticipated working capital requirements and capital expenditures in the ordinary course of business for the next 12 months, we cannot assure you this will be the case. We may need additional cash resources in the future if we experience changes in business conditions or other developments. We may also need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, capital expenditure or similar actions. 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 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 would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

Our ability to protect the confidential information of our borrowers and investors may be adversely affected by cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions.

Our platform collects, stores and processes certain personal and other sensitive data from our borrowers and investors, which makes it an attractive 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 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. Any accidental or willful security breaches or other unauthorized access to our platform could cause confidential borrower and investor information to be stolen and used for criminal purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, our relationships with borrowers and investors could be severely damaged, we could incur significant liability and our business and operations could be adversely affected.

 

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In connection with the audits of our consolidated financial statements as of and for the years ended December 31, 2014, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. If we fail to develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the audits of our consolidated financial statements as of and for the two years ended December 31, 2014, we and our independent registered public accounting firm identified two “material weaknesses,” and other control deficiencies including significant 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, or PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

One material weakness that has been identified related to our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to properly address complex U.S. GAAP accounting issues and to prepare and review our consolidated financial statements and related disclosures to fulfill U.S. GAAP and SEC financial reporting requirements. The other material weakness that has been identified related to our lack of comprehensive accounting policies and procedures manual in accordance with U.S. GAAP.

Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting as we and they will be required to do after we become a public 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 deficiencies may have been identified.

Upon completion of this offering, we will become subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, will require that we include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2016. 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 must attest to and 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, 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

 

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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 ADSs. 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.

Our operations depend on the performance of the internet infrastructure and fixed telecommunications networks in China.

Almost all access to the internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or the MIIT. We primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines and internet data centers to host our servers. We have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with the increasing traffic on our platform. We cannot assure you that the internet infrastructure and the fixed telecommunications networks in China will be able to support the demands associated with the continued growth in internet usage.

In addition, we have no control over the costs of the services provided by telecommunication service providers. If the prices we pay for telecommunications and internet services rise significantly, our results of operations may be adversely affected. Furthermore, if internet access fees or other charges to internet users increase, our user traffic may decline and our business may be harmed.

Any significant disruption in service on our platform or in our computer systems, including events beyond our control, could prevent us from processing or posting loans on our marketplace, reduce the attractiveness of our marketplace and result in a loss of borrowers or investors.

In the event of a platform outage and physical data loss, our ability to perform our servicing obligations, process applications or make loans available on our marketplace would be materially and adversely affected. The satisfactory performance, reliability and availability of our platform and our underlying network infrastructure are critical to our operations, customer service, reputation and our ability to retain existing and attract new borrowers and investors. Much of our system hardware is hosted in a leased facility located in Beijing that is operated by our IT Staff. We also maintain a real-time backup system at a separate facility also located in Beijing. Our operations depend on our ability to protect our systems against damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, computer viruses or attempts to harm our systems, criminal acts and similar events. If there is a lapse in service or damage to our leased Beijing facilities, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities.

Any interruptions or delays in our service, whether as a result of third-party error, our error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with our borrowers and investors and our reputation. Additionally, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover all data and services in the event of an outage. These factors could prevent us from processing or posting payments on loans, damage our brand and reputation, divert our employees’ attention, subject us to liability and cause borrowers and investors to abandon our marketplace, any of which could adversely affect our business, financial condition and results of operations.

 

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Our platform and internal systems rely on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.

Our platform and internal systems rely on software that is highly technical and complex. In addition, our platform and internal systems depend on the ability of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for borrowers and investors using our platform, delay introductions of new features or enhancements, result in errors or compromise our ability to protect borrower or investor data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of borrowers or investors or liability for damages, any of which could adversely affect our business, results of operations and financial conditions.

We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.

We regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights. We have two trademark applications pending with the Trademark Office under the State Administration for Industry and Commerce, and the yirendai.com domain name with the Internet Corporation for Assigned Names and Numbers, or ICANN. We have also obtained a worldwide and royalty-free license from CreditEase to use its trademarks, including an exclusive license to use “ LOGO ” (Chinese equivalent for Yirendai), among others. See “Business—Intellectual Property.” Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient to provide us with competitive advantages. In addition, because of the rapid pace of technological change in our industry, parts of our business rely on technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all.

It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.

We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. We may be from time to time in the future subject to legal proceedings and claims relating to the

 

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intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.

Additionally, the application and interpretation of China’s intellectual property right laws and the procedures and standards for granting trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and we cannot assure you that PRC courts or regulatory authorities would agree with our analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.

From time to time we may evaluate and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt our business and adversely affect our financial results.

We may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our marketplace and better serve borrowers and investors. These transactions could be material to our financial condition and results of operations if consummated. If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and, even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction.

Strategic investments or acquisitions will involve risks commonly encountered in business relationships, including:

 

    difficulties in assimilating and integrating the operations, personnel, systems, data, technologies, products and services of the acquired business;

 

    inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;

 

    difficulties in retaining, training, motivating and integrating key personnel;

 

    diversion of management’s time and resources from our normal daily operations;

 

    difficulties in successfully incorporating licensed or acquired technology and rights into our platform and loan products;

 

    difficulties in maintaining uniform standards, controls, procedures and policies within the combined organizations;

 

    difficulties in retaining relationships with customers, employees and suppliers of the acquired business;

 

    risks of entering markets in which we have limited or no prior experience;

 

    regulatory risks, including remaining in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being subject to new regulators with oversight over an acquired business;

 

    assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk for liability;

 

    failure to successfully further develop the acquired technology;

 

    liability for activities of the acquired business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;

 

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    potential disruptions to our ongoing businesses; and

 

    unexpected costs and unknown risks and liabilities associated with strategic investments or acquisitions.

We may not make any investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business strategy, may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits. In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will lead to the successful development of new or enhanced loan products and services or that any new or enhanced loan products and services, if developed, will achieve market acceptance or prove to be profitable.

Our business depends on the continued efforts of our senior management. If one or more of our key executives were unable or unwilling to continue in their present positions, our business may be severely disrupted.

Our business operations depend on the continued services of our senior management, particularly the executive officers named in this prospectus. While we have provided different incentives to our management, we cannot assure you that we can continue to retain their services. If one or more of our key executives were unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain qualified personnel. In addition, although we have entered into confidentiality and non-competition agreements with our management, there is no assurance that any member of our management team will not join our competitors or form a competing business. If any dispute arises between our current or former officers and us, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.

Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business.

We believe our success depends on the efforts and talent of our employees, including risk management, software engineering, financial and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled technical, risk management and financial personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.

In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve borrowers and investors could diminish, resulting in a material adverse effect to our business.

Increases in labor costs in the PRC may adversely affect our business and results of operations.

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, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments to the statutory employee benefits, and those employers who fail to make adequate

 

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payments may be subject to late payment fees, fines and/or other penalties. 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.

If we cannot maintain our corporate culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.

We believe that a critical component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates creativity. As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.

We do not have any business insurance coverage.

Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of insuring for these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions may result in our incurring substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide products and services on our platform.

Our business could also be adversely affected by the effects of Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory Syndrome, or SARS, or other epidemics. Our business operations could be disrupted if any of our employees is suspected of having Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or other epidemic, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.

Risks Related to Our Carve-out from CreditEase and Our Relationship with CreditEase

We rely on our parent company, CreditEase, for the successful operation of our business.

We have no experience operating as a stand-alone company. We commenced our online consumer finance marketplace business in March 2012, and Yirendai Ltd. was incorporated in 2014 in the Cayman Islands as a wholly owned subsidiary of CreditEase. We completed our carve-out from CreditEase in the first quarter of 2015. Historically, CreditEase has provided us with origination and servicing, financial, administrative, sales and marketing, risk management, human resources and legal services, and also with the services of a number of its executives and employees. Although we have become a stand-alone company, we expect CreditEase to continue to provide us with certain support services during a transitional period. We have also relied on CreditEase for the

 

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successful operation of our online consumer finance marketplace. In the future, we expect to continue to rely on CreditEase for various aspects of our operations, such as risk management, offline acquisition of new borrowers and investors and outstanding loan collection services. Although we plan to enter into a series of agreements with CreditEase relating to our ongoing business cooperation and service arrangements with CreditEase, we cannot assure you that we will continue to receive the same level of support from CreditEase after we become a stand-alone company. Borrowers, investors and business partners may react negatively to our carve-out from CreditEase. As such, our carve-out from CreditEase may materially and adversely affect our business.

Our financial information included in this prospectus may not be representative of our financial condition and results of operations if we had been operating as a stand-alone company.

Prior to the establishment of Yirendai Ltd., our online consumer finance marketplace business was carried out by various subsidiaries and variable interest entities of CreditEase. We completed our carve-out from CreditEase in the first quarter of 2015, and all of our online consumer finance marketplace business is carried out by our own subsidiaries and consolidated variable interest entity. Since we and CreditEase are under common control, our consolidated financial statements include the assets, liabilities, revenues, expenses and cash flows that were directly attributable to our business for all periods presented. Only those assets and liabilities that are specifically identifiable to our business are included in our consolidated balance sheets. Our consolidated statements of operations consisted of all costs and expenses related to us, including costs and expenses related to us that were allocated from CreditEase. Allocations from CreditEase, including amounts allocated to origination and servicing expenses, sales and marketing expenses and general and administrative expenses, were made using a proportional cost allocation method and based on headcount or transaction volume for the provision of services attributable to us. We made numerous estimates, assumptions and allocations in our historical financial statements because we did not operate as a stand-alone company for any of the periods presented. Although our management believes that the assumptions underlying our financial statements and the above allocations are reasonable, our financial statements may not necessarily reflect our results of operations, financial position and cash flows as if we had operated as a stand-alone company during the periods presented. See “Our Relationship with CreditEase” for our arrangements with CreditEase and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our consolidated financial statements included elsewhere in this prospectus for our historical cost allocation. In addition, upon becoming a stand-alone company, we will establish our own financial, administrative and other support systems to replace CreditEase’s systems, the cost of which could be significantly different from cost allocation with CreditEase for the same services. Therefore, you should not view our historical results as indicators of our future performance.

Any negative development in CreditEase’s market position, brand recognition or financial condition may materially and adversely affect our marketing efforts and the strength of our brand.

We are a wholly-owned subsidiary of CreditEase and will continue to be an affiliate of CreditEase after this offering, as CreditEase is expected to remain our controlling shareholder. We have benefited significantly and expect to continue to benefit significantly from our association with CreditEase in marketing our brand and our marketplace. For example, we have benefited by providing services to CreditEase’s clients. We also benefit from CreditEase’s strong brand recognition in China, which provides us credibility and a broad marketing reach. If CreditEase loses its market position, the effectiveness of our marketing efforts through our association with CreditEase may be materially and adversely affected. In addition, any adverse development in the financial condition of CreditEase and negative publicity associated with CreditEase will likely have an adverse impact on the effectiveness of our marketing as well as our reputation and brand.

Our agreements with CreditEase may be less favorable to us than similar agreements negotiated between unaffiliated third parties. In particular, our non-competition agreement with CreditEase limits the scope of business that we are allowed to conduct.

We plan to enter into a series of agreements with CreditEase and the terms of such agreements may be less favorable to us than would be the case if they were negotiated with unaffiliated third parties. In particular, under

 

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our non-competition agreement with CreditEase, we agree during the non-competition period, which will end on the earlier of (i) one year after the control ending date and (ii) the fifteenth anniversary of the completion of this offering, not to compete with CreditEase in the business currently conducted by CreditEase, other than the online consumer finance marketplace business currently conducted or contemplated to be conducted by us as of the date of the agreement and any other businesses that we and CreditEase may mutually agree from time to time. The control ending date refers to the earlier of (i) the first date when CreditEase no longer owns at least 20% of the voting power of our then outstanding securities and (ii) the first date when CreditEase ceases to be the largest beneficial owner of our then outstanding voting securities. Such contractual limitations may significantly affect our ability to diversify our revenue sources and may materially and adversely impact our business and prospects should the growth of online consumer finance marketplace industry in China slow down. In addition, pursuant to our master transaction agreement with CreditEase, we agree to indemnify CreditEase for liabilities arising from litigation and other contingencies related to our business and assumed these liabilities as part of our carve-out from CreditEase. The allocation of assets and liabilities between CreditEase and our company may not reflect the allocation that would have been reached by two unaffiliated parties. Moreover, so long as CreditEase continues to control us, we may not be able to bring a legal claim against CreditEase in the event of contractual breach, notwithstanding our contractual rights under the agreements described above and other inter-company agreements entered into from time to time.

CreditEase will control the outcome of shareholder actions in our company.

Upon completion of this offering, CreditEase will hold         % of our outstanding ordinary shares, representing         % of our total voting power, assuming the underwriters do not exercise their over-allotment option. CreditEase has advised us that it does not anticipate disposing of its voting control in us in the near future. CreditEase’s voting power gives it the power to control certain actions that require shareholder approval under Cayman Islands law, our memorandum and articles of association and [NYSE/NASDAQ] requirements, including approval of mergers and other business combinations, changes to our memorandum and articles of association, the number of shares available for issuance under any share incentive plans, and the issuance of significant amounts of our ordinary shares in private placements.

CreditEase’s voting control may cause transactions to occur that might not be beneficial to you as a holder of ADSs and may prevent transactions that would be beneficial to you. For example, CreditEase’s voting control may prevent a transaction involving a change of control of us, including transactions in which you as a holder of our ADSs might otherwise receive a premium for your securities over the then-current market price. In addition, CreditEase is not prohibited from selling a controlling interest in us to a third party and may do so without your approval and without providing for a purchase of your ADSs. If CreditEase is acquired or otherwise undergoes a change of control, any acquirer or successor will be entitled to exercise the voting control and contractual rights of CreditEase, and may do so in a manner that could vary significantly from that of CreditEase. In addition, the significant concentration of share ownership may adversely affect the trading price of the ADSs due to investors’ perception that conflicts of interest may exist or arise. See “—We may have conflicts of interest with CreditEase and, because of CreditEase’s controlling ownership interest in our company, we may not be able to resolve such conflicts on favorable terms for us.”

We may have conflicts of interest with CreditEase and, because of CreditEase’s controlling ownership interest in our company, we may not be able to resolve such conflicts on favorable terms for us.

Conflicts of interest may arise between CreditEase and us in a number of areas relating to our ongoing relationships. Potential conflicts of interest that we have identified include the following:

 

   

Non-competition arrangements with CreditEase. We and CreditEase plan to enter into a non-competition agreement under which we agree not to compete with each other’s core business. CreditEase agrees not to compete with us in a business that is of the same nature as (i) the online consumer finance marketplace business currently conducted or contemplated to be conducted by us as of the date of the agreement and (ii) other businesses that we and CreditEase may mutually agree from

 

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time to time. We agree not to compete with CreditEase in the business conducted by CreditEase, other than (i) the online consumer finance marketplace business operated by us as of the date of the agreement and (ii) other businesses that we and CreditEase may mutually agree from time to time.

 

    Employee recruiting and retention. Because both CreditEase and we are engaged in consumer finance related businesses in China, we may compete with CreditEase in the hiring of new employees, in particular with respect to risk management related matters. We have a non-solicitation arrangement with CreditEase that restricts us and CreditEase from hiring any of each other’s employees.

 

    Our board members or executive officers may have conflicts of interest. Our executive chairman, Ning Tang, and two directors, Quan Zhou and Tina Ju, also constitute the board of directors of CreditEase. In addition, we may grant incentive share compensation to CreditEase’s employees and consultants in the future. These relationships could create, or appear to create, conflicts of interest when these persons are faced with decisions with potentially different implications for CreditEase and us.

 

    Sale of shares in our company. CreditEase may decide to sell all or a portion of our shares that it holds to a third party, including to one of our competitors, thereby giving that third party substantial influence over our business and our affairs. Such a sale could be contrary to the interests of our employees or our other shareholders.

 

    Allocation of business opportunities. Under our non-compete agreement with CreditEase, we agree not to compete with CreditEase in the businesses conducted by CreditEase. There may arise other business opportunities that both we and CreditEase find attractive and which would complement our respective businesses. CreditEase may decide to take such opportunities itself, which would prevent us from taking advantage of those opportunities.

 

    Developing business relationships with CreditEase’s competitors. So long as CreditEase remains our controlling shareholder, we may be limited in our ability to do business with its competitors. This may limit our ability to market our services for the best interests of our company and our other shareholders.

Although our company will become a stand-alone public company, we expect to operate, for as long as CreditEase is our controlling shareholder, as an affiliate of CreditEase. CreditEase may from time to time make strategic decisions that it believes are in the best interests of its business as a whole, including our company. These decisions may be different from the decisions that we would have made on our own. For example, we may be required to pay CreditEase for services that we currently enjoy free of charge from CreditEase, such as the information and data sharing provided for in our intellectual property license agreement with CreditEase. See “Our Relationship with CreditEase—Intellectual Property License Agreement.” CreditEase’s decisions with respect to us or our business may be resolved in ways that favor CreditEase and therefore CreditEase’s own shareholders, which may not coincide with the interests of our other shareholders. We may not be able to resolve any potential conflicts, and even if we do so, the resolution may be less favorable to us than if we were dealing with a non-controlling shareholder. Even if both parties seek to transact business on terms intended to approximate those that could have been achieved between unaffiliated parties, this may not succeed in practice. Furthermore, if CreditEase sought to alter or violate the terms of the non-competition agreement with us in order to compete with us in the online consumer finance marketplace or otherwise, such conflicts may not be resolved in our favor in light of CreditEase’s controlling interest in us. If CreditEase were to compete with us, our business, financial condition, results of operations and prospects could be materially and adversely affected.

Our executive chairman, Mr. Ning Tang, has considerable influence over us and our corporate matters.

Our executive chairman, Mr. Ning Tang, has considerable influence over us and our corporate matters. Mr. Tang beneficially owns 43.4% of the total outstanding shares of CreditEase, which is our sole shareholder as of the date of this prospectus, and will remain our parent company and controlling shareholder upon the completion of this offering. Moreover, as Mr. Tang, as a director of CreditEase, currently holds three out of the five votes of CreditEase’s board of directors, he therefore controls the decision making of CreditEase and indirectly has considerable influence over us and our corporate matters. After this offering, Mr. Tang will continue to have considerable influence over matters requiring shareholder approval, such as electing directors and approving material mergers, acquisitions or other business combination transactions. This concentrated

 

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control will limit your ability to influence corporate matters and could also discourage others from pursuing any potential merger, takeover or other change of control transactions, which could have the effect of depriving the holders of our ordinary shares and our ADSs of the opportunity to sell their shares at a premium over the prevailing market price.

We will be a “controlled company” within the meaning of the [NYSE Listed Company Manual/NASDAQ Stock Market Rules] and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.

We are a “controlled company” as defined under the [NYSE Listed Company Manual/NASDAQ Stock Market Rules] because CreditEase beneficially owns more than 50% of our outstanding ordinary shares. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and will rely, on certain exemptions from corporate governance rules, including an exemption from the rule that a majority of our board of directors must be independent directors. As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

Risks Related to Our Corporate Structure

If the PRC government deems that the contractual arrangements in relation to our consolidated variable interest entity do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

Foreign ownership of internet-based businesses, such as distribution of online information, is subject to restrictions under current PRC laws and regulations. For example, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record in accordance with the Guidance Catalog of Industries for Foreign Investment promulgated in 2007, as amended in 2011 and in 2015, respectively, and other applicable laws and regulations.

We are a Cayman Islands company and our PRC subsidiary is considered a foreign invested enterprise. To comply with PRC laws and regulations, we conduct our operations in China through a series of contractual arrangements entered into among Heng Ye, Heng Cheng and the shareholders of Heng Cheng. As a result of these contractual arrangements, we exert control over Heng Cheng and consolidate its operating results in our financial statements under U.S. GAAP. For a detailed description of these contractual arrangements, see “Corporate History and Structure.”

In the opinion of our PRC counsel, Han Kun Law Offices, our current ownership structure, the ownership structure of our PRC subsidiary and our consolidated variable interest entity, and the contractual arrangements among Heng Ye, Heng Cheng and the shareholders of Heng Cheng are not in violation of existing PRC laws, rules and regulations; and these contractual arrangements are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect. However, Han Kun Law Offices has also advised us that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations and there can be no assurance that the PRC government will ultimately take a view that is consistent with the opinion of our PRC counsel.

It is uncertain whether any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. In particular, in January 2015, the Ministry of Commerce, or MOC, published a discussion draft of the proposed Foreign Investment Law for public review and comments. 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, or an FIE. Under the draft Foreign Investment Law, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not taken a position on what actions will be taken with respect to the existing companies with the “variable interest entity” structure, whether or not these companies are controlled by Chinese parties. It is uncertain when the draft would be signed into law and whether the final version would have any substantial changes from the draft. See “Regulation—Regulations Relating to Foreign Investment—The

 

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Draft PRC Foreign Investment Law” and “—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.” If the ownership structure, contractual arrangements and business of our company, our PRC subsidiary or our consolidated variable interest entity are found to be in violation of any existing or future PRC laws or regulations, or we fail to obtain or maintain any of the required permits or approvals, the relevant governmental authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income or the income of our PRC subsidiary or consolidated variable interest entity, revoking the business licenses or operating licenses of our PRC subsidiary or consolidated variable interest entity, shutting down our servers or blocking our online platform, discontinuing or placing restrictions or onerous conditions on our operations, requiring us to undergo a costly and disruptive restructuring, restricting or prohibiting our use of proceeds from this offering to finance our business and operations in China, and taking other regulatory or enforcement actions that could be harmful to our business. Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If any of these occurrences results in our inability to direct the activities of our consolidated variable interest entity, and/or our failure to receive economic benefits from our consolidated variable interest entity, we may not be able to consolidate its results into our consolidated financial statements in accordance with U.S. GAAP.

We rely on contractual arrangements with our consolidated variable interest entity and its shareholders for a portion of our business operations, which may not be as effective as direct ownership in providing operational control.

We have relied and expect to continue to rely on contractual arrangements with Heng Cheng and its shareholders to operate our www.yirendai.com website. For a description of these contractual arrangements, see “Corporate History and Structure.” These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated variable interest entity. For example, our consolidated variable interest entity and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct its operations, including maintaining our website and using the domain names and trademarks, in an acceptable manner or taking other actions that are detrimental to our interests.

If we had direct ownership of Heng Cheng, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of Heng Cheng, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our consolidated variable interest entity and its shareholders of their obligations under the contracts to exercise control over our consolidated variable interest entity. The shareholders of our consolidated variable interest entity may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate our business through the contractual arrangements with our consolidated variable interest entity. Although we have the right to replace any shareholder of our consolidated variable interest entity under the contractual arrangement, if any shareholder of our consolidated variable interest entity is uncooperative or any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “—Any failure by our consolidated variable interest entity or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.” Therefore, our contractual arrangements with our consolidated variable interest entity may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

Any failure by our consolidated variable interest entity or its shareholders to perform their obligations under our contractual arrangements with them would have a material adverse effect on our business.

If our consolidated variable interest entity or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking

 

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specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under PRC laws. For example, if the shareholders of Heng Cheng were to refuse to transfer their equity interest in Heng Cheng to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

All the agreements under our contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some 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. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated variable interest entity should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated variable interest entity, and our ability to conduct our business may be negatively affected. See “—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to you and us.”

The shareholders of our consolidated variable interest entity may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

The equity interests of Heng Cheng are held by Mr. Ning Tang, our founder and executive chairman, and two other individuals, Mr. Fanshun Kong and Ms. Yan Tian. Their interests in Heng Cheng may differ from the interests of our company as a whole. These shareholders may breach, or cause our consolidated variable interest entity to breach, the existing contractual arrangements we have with them and our consolidated variable interest entity, which would have a material adverse effect on our ability to effectively control our consolidated variable interest entity and receive economic benefits from it. For example, the shareholders may be able to cause our agreements with Heng Cheng to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor.

Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company, except that we could exercise our purchase option under the exclusive option agreement with these shareholders to request them to transfer all of their equity interests in Heng Cheng to a PRC entity or individual designated by us, to the extent permitted by PRC laws. If we cannot resolve any conflict of interest or dispute between us and the shareholders of Heng Cheng, we would have to rely on legal proceedings, which could result in the disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

Contractual arrangements in relation to our consolidated variable interest entity may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC consolidated variable interest entity owe additional taxes, which could negatively affect our financial condition and the value of your investment.

Under applicable 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. The PRC enterprise income tax law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant

 

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tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles. We may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements between Heng Ye, our wholly-owned subsidiary in China, Heng Cheng, our consolidated variable interest entity in China, and the shareholders of Heng Cheng were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust Heng Cheng’s income in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by Heng Cheng for PRC tax purposes, which could in turn increase its tax liabilities without reducing Heng Ye’s tax expenses. In addition, if Heng Ye requests the shareholders of Heng Cheng to transfer their equity interests in Heng Cheng at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject Heng Ye to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on Heng Cheng for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our consolidated variable interest entity’s tax liabilities increase or if it is required to pay late payment fees and other penalties.

We may lose the ability to use and enjoy assets held by our consolidated variable interest entity that are material to the operation of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

Our consolidated variable interest entity holds certain assets that are material to the operation of our business, including domain names and an ICP license. Under the contractual arrangements, our consolidated variable interest entity may not and its shareholders may not cause it to, in any manner, sell, transfer, mortgage or dispose of its assets or its legal or beneficial interests in the business without our prior consent. However, in the event our consolidated variable interest entity’s shareholders breach the these contractual arrangements and voluntarily liquidate our consolidated variable interest entity, or our consolidated variable interest entity declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. If our consolidated variable interest entity undergoes a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

If the chops of our PRC subsidiary and consolidated variable interest entity are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised.

In China, a company chop or seal serves as the legal representation of the company towards third parties even when unaccompanied by a signature. Each legally registered company in China is required to maintain a company chop, which must be registered with the local Public Security Bureau. In addition to this mandatory company chop, companies may have several other chops which can be used for specific purposes. The chops of our PRC subsidiary and consolidated variable interest entity are generally held securely by personnel designated or approved by us in accordance with our internal control procedures. To the extent those chops are not kept safely, are stolen or are used by unauthorized persons or for unauthorized purposes, the corporate governance of these entities could be severely and adversely compromised and those corporate entities may be bound to abide by the terms of any documents so chopped, even if they were chopped by an individual who lacked the requisite power and authority to do so. In addition, if the chops are misused by unauthorized persons, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from our operations.

 

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Risks Related to Doing Business in China

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and results of operations.

Substantially all of our operations are located in China. Accordingly, our business, prospects, financial condition and results of operations may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.

While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, the Chinese economy has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for our products and services and materially and adversely affect our business and results of operations.

Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to us.

The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. 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.

In particular, PRC laws and regulations concerning the peer-to-peer lending service industry are developing and evolving. Although we have taken measures to comply with the laws and regulations that are applicable to our business operations, including the regulatory principles raised by the CBRC, and avoid conducting any activities that may be deemed as illegal fund-raising, forming capital pool or providing guarantee to investors under the current applicable laws and regulations, the PRC government authority may promulgate new laws and regulations regulating the peer-to-peer lending service industry in the future. We cannot assure you that our practice would not be deemed to violate any PRC laws or regulations relating to illegal fund-raising, capital pool or provision of guarantee. Moreover, developments in the peer-to-peer lending service industry may lead to changes in PRC laws, regulations and policies or in the interpretation and application of existing laws, regulations and policies that may limit or restrict online consumer finance marketplaces like us, which could materially and adversely affect our business and operations. Furthermore, we cannot rule out the possibility that the PRC government will institute a licensing regime covering our industry at some point in the future. If such a licensing regime were introduced, we cannot assure you that we would be able to obtain any newly required

 

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license in a timely manner, or at all, which could materially and adversely affect our business and impede our ability to continue our operations.

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. Furthermore, the PRC legal system is based in part on government policies and internal rules (some of which are not published in a timely manner or at all) that may have retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Such uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural rights, could materially and adversely affect our business and impede our ability to continue our 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 MOC published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the trio of 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. The draft Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The MOC is currently soliciting comments on this draft and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment Law, if enacted as proposed, may materially impact the viability of our current corporate structure, corporate governance and business operations in many aspects.

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, or an FIE. The draft Foreign Investment Law specifically provides that entities established in China but “controlled” by foreign investors will be treated as FIEs. Once an entity is considered to be an FIE, it may be subject to the foreign investment restrictions or prohibitions set forth in a “negative list” to be separately issued by the State Council later. If an FIE proposes to conduct business in an industry subject to foreign investment “restrictions” in the “negative list,” the FIE must go through a market entry clearance by the MOC before being established. If an FIE proposes to conduct business in an industry subject to foreign investment “prohibitions” in the “negative list,” it must not engage in the business. However, an FIE that is subject to foreign investment “restrictions,” upon market entry clearance, may apply in writing for being treated as a PRC domestic investment if it is ultimately “controlled” by PRC government authorities and its affiliates and/or PRC citizens. In this connection, “control” is broadly defined in the draft law to cover the following summarized categories: (i) holding 50% or more of the voting rights of the subject entity; (ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to exert material influence on the board, the shareholders’ meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operations, financial matters or other key aspects of business operations. 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,” to be separately issued by the State Council at a later date, if the FIE is engaged in an industry listed in the negative list. Unless the underlying business of the FIE falls within the negative list, which calls for market entry clearance by the MOC, prior approval from the government authorities as mandated by the existing foreign investment legal regime would no longer be required for establishment of the FIE.

 

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The “variable interest entity” structure, or 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. See “—Risks Related to Our Corporate Structure” and “Our Corporate History and Structure.” Under the draft Foreign Investment Law, variable interest entities 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 included in the “negative list” as restricted industry, the VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC companies or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the variable interest entities will be treated as FIEs and any operation in the industry category on the “negative list” without market entry clearance may be considered as illegal.

It is uncertain whether we would be considered as ultimately controlled by Chinese parties. We are a wholly-owned subsidiary of CreditEase as of the date of this prospectus, and upon the completion of this offering, CreditEase will remain our parent company and controlling shareholder. Although Mr. Ning Tang, our executive chairman and a PRC citizen, owns less than 50% of the voting power of CreditEase, he has the power to appoint three directors on the five-member board of CreditEase. It is uncertain, however, these factors would be sufficient to give Mr. Tang control over us under the draft Foreign Investment Law. Moreover, the draft Foreign Investment Law has not taken a position on what actions will be taken with respect to the existing companies with a VIE structure, whether or not these companies are controlled by Chinese parties, while it is soliciting comments from the public on this point. In addition, it is uncertain whether the online consumer finance marketplace industry, in which our variable interest entity operates, will be subject to the foreign investment restrictions or prohibitions set forth in the “negative list” that is to be issued. If the enacted version of the Foreign Investment Law and the final “negative list” mandate further actions, such as MOC market entry clearance or certain restructuring of our corporate structure and operations, to be completed by companies with existing VIE structure like us, there may be substantial uncertainties as to whether we can complete these actions in a timely manner, or at all, and our business and financial condition may be materially and adversely affected.

The draft Foreign Investment Law, if enacted as proposed, may also materially impact our corporate governance practice and increase our compliance costs. For instance, the draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Aside from an investment implementation report and an investment amendment report that are required for each investment and alteration of investment specifics, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.

We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.

The PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.

We only have contractual control over our website. We do not directly own the website due to the restriction of foreign investment in businesses providing value-added telecommunication services in China, including internet information provision services. This may significantly disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements, or have other harmful effects on us.

 

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The evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example, in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office (with the involvement of the State Council Information Office, the MITT, and the Ministry of Public Security). The primary role of this new agency is to facilitate the policy-making and legislative development in this field, to direct and coordinate with the relevant departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to the internet industry.

Our online marketplace, operated by our consolidated variable interest entity, Heng Cheng, may be deemed to be providing commercial internet information services, which would require Heng Cheng to obtain an ICP License. An ICP License is a value-added telecommunications business operating license required for provision of commercial internet information services. See “Regulation—Regulations on Value-Added Telecommunication Services.” Heng Cheng, our PRC consolidated variable interest entity has obtained an ICP license as an internet information provider. Furthermore, as we are providing mobile applications to mobile device users, it is uncertain if Heng Cheng will be required to obtain a separate operating license in addition to the ICP License. Although we believe that not obtaining such separate license is in line with the current market practice, there can be no assurance that we will not be required to apply for an operating license for our mobile applications in the future.

The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, issued by the MITT in July 2006, prohibits domestic telecommunication service providers from leasing, transferring or selling telecommunications business operating licenses to any foreign investor in any form, or providing any resources, sites or facilities to any foreign investor for their illegal operation of a telecommunications business in China. According to this circular, either the holder of a value-added telecommunication services operation permit or its shareholders must directly own the domain names and trademarks used by such license holders in their provision of value-added telecommunication services. The circular also requires each license holder to have the necessary facilities, including servers, for its approved business operations and to maintain such facilities in the regions covered by its license. Heng Cheng owns the relevant domain names in connection with our value-added telecommunications business and has the necessary personnel to operate our website. However, CreditEase currently owns certain trademarks relating to our value-added telecommunications business, such as “ LOGO ”, and CreditEase is in the process of transferring these trademarks including “ LOGO ” to Heng Cheng. If an ICP License holder fails to comply with the requirements and also fails to remedy such non-compliance within a specified period of time, the MITT or its local counterparts have the discretion to take administrative measures against such license holder, including revoking its ICP License.

The interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.

Any failure by our third-party service providers to comply with applicable anti-money laundering laws and regulations could damage our reputation.

We believe we are not currently subject to anti-money laundering obligations under the PRC Anti-money Laundering Law. However, we rely on our third-party service providers, in particular the custody banks and

 

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payment companies that handle the transfer of funds between borrowers and lenders, to have their own appropriate anti-money laundering policies and procedures. The custody banks and payment companies are subject to anti-money laundering obligations under applicable anti-money laundering laws and regulations and are regulated in that respect by the PBOC. If any of our third-party service provides fail to comply with applicable anti-money laundering laws and regulations, our reputation could suffer and we could become subject to regulatory intervention, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, due to the lack of detailed rules and guidance and the fact that laws and regulations are evolving in this emerging online consumer finance marketplace industry, we cannot assure you that we will not be subject to anti-money laundering obligations in the future. While we have adopted policies and procedures, including internal controls and “know-your-customer” procedures, aimed at preventing money laundering, we cannot assure you that such policies and procedures will be effective in protecting our marketplace from being exploited for money laundering purposes or, if we become subject to anti-money laundering obligations in the future, that such policies and procedures will be deemed to be in compliance with applicable anti-money laundering laws and regulations.

We rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiary to make payments to us could have a material adverse effect on our ability to conduct our business.

We are a holding company, and we rely on dividends and other distributions on equity paid by our PRC subsidiary for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. If our PRC subsidiary incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require Heng Ye to adjust its taxable income under the contractual arrangements it currently has in place with our consolidated variable interest entity in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us. See “—Risks Related to Our Corporate Structure—Contractual arrangements in relation to our consolidated variable interest entity may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC consolidated variable interest entity owe additional taxes, which could negatively affect our financial condition and the value of your investment.”

Under PRC laws and regulations, our PRC subsidiary, as a wholly foreign-owned enterprise in China, may pay dividends only out of their respective accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.

Any limitation on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business. See also “—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”

 

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

Under PRC laws and regulations, we are permitted to utilize the proceeds from this offering to fund our PRC subsidiary by making loans to or additional capital contributions to our PRC subsidiary, subject to applicable government registration and approval requirements.

Any loans to our PRC subsidiary, which are treated as foreign-invested enterprises under PRC laws, are subject to PRC regulations and foreign exchange loan registrations. For example, loans by us to our PRC subsidiary to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of the State Administration of Foreign Exchange, or SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the MOC or its local counterpart and the amount of registered capital of such foreign-invested company.

We may also decide to finance our PRC subsidiary by means of capital contributions. These capital contributions must be approved by the MOC or its local counterpart. In addition, SAFE issued a circular in September 2008, SAFE Circular No. 142, regulating the conversion by a foreign-invested enterprise of foreign currency registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular No. 142 provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and unless otherwise provided by law, may not be used for equity investments within the PRC. Although on July 4, 2014, the SAFE issued the Circular of the SAFE on Relevant Issues Concerning the Pilot Reform in Certain Areas of the Administrative Method of the Conversion of Foreign Exchange Funds by Foreign-invested Enterprises, or SAFE Circular 36, which launched a pilot reform of the administration of the settlement of the foreign exchange capitals of foreign-invested enterprises in certain designated areas from August 4, 2014 and some of the restrictions under SAFE Circular 142 will not apply to the settlement of the foreign exchange capitals of the foreign-invested enterprises established within the designate areas and such enterprises are allowed to use its RMB capital converted from foreign exchange capitals to make equity investment, our PRC subsidiary is not established within the designated areas. On March 30, 2015, SAFE promulgated Circular 19, to expand the reform nationwide. Circular 19 will come into force and replace both Circular 142 and Circular 36 on June 1, 2015. Circular 19 will allow foreign-invested enterprises to make equity investments by using RMB fund converted from foreign exchange capital. However, Circular 19 will continue to prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, providing entrusted loans or repaying loans between non-financial enterprises. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of a foreign-invested company. The use of such RMB capital may not be altered without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations of these Circulars could result in severe monetary or other penalties. In November 2011, SAFE also promulgated SAFE Circular No. 45, which, among other things, restricts a foreign-invested enterprise from using RMB converted from its registered capital to provide entrusted loans or repay loans between non-financial enterprises. These circulars may significantly limit our ability to use RMB converted from the net proceeds of this offering to fund the establishment of new entities in China by our PRC subsidiary, to invest in or acquire any other PRC companies through our PRC subsidiary, or to establish new variable interest entities in the PRC.

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 to our PRC subsidiary or future capital contributions by us to our PRC subsidiary. If we fail to

 

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complete such registrations or obtain such approvals, our ability to use the proceeds we expect to receive from this 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.

Fluctuations in exchange rates could have a material adverse effect on our results of operations and the value of your investment.

Substantially all of our revenues and expenditures are denominated in RMB, whereas our reporting currency is the U.S. dollar. As a result, fluctuations in the exchange rate between the U.S. dollar and RMB will affect the relative purchasing power in RMB terms of our U.S. dollar assets and the proceeds from this offering. Our reporting currency is the U.S. dollar while the functional currency for our PRC subsidiary and consolidated variable interest entity is RMB. Gains and losses from the remeasurement of assets and liabilities that are receivable or payable in RMB are included in our consolidated statements of operations. The remeasurement has caused the U.S. dollar value of our results of operations to vary with exchange rate fluctuations, and the U.S. dollar value of our results of operations will continue to vary with exchange rate fluctuations. A fluctuation in the value of RMB relative to the U.S. dollar could reduce our profits from operations and the translated value of our net assets when reported in U.S. dollars in our financial statements. This could have a negative impact on our business, financial condition or results of operations as reported in U.S. dollars. If we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. In addition, fluctuations in currencies relative to the periods in which the earnings are generated may make it more difficult to perform period-to-period comparisons of our reported results of operations.

The value of the RMB against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. However, the People’s Bank of China, or the PBOC, regularly intervenes in the foreign exchange market to limit fluctuations in RMB exchange rates and achieve policy goals. During the period between July 2008 and June 2010, the exchange rate between the RMB and the U.S. dollar had been stable and traded within a narrow range. However, the RMB fluctuated significantly during that period against other freely traded currencies, in tandem with the U.S. dollar. Since June 2010, the RMB has started to slowly appreciate against the U.S. dollar, though there have been periods recently when the U.S. dollar has appreciated against the RMB. It is difficult to predict how long the current situation may last and when and how the relationship between the RMB and the U.S. dollar may change again.

There remains significant international pressure on the PRC government to adopt a flexible currency policy. Any significant appreciation or depreciation of the RMB may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive from this initial public offering into RMB to pay our operating expenses, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of the RMB against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs.

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. 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. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

 

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Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.

The PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our net revenues in RMB. Under our current corporate structure, our company in the Cayman Islands rely on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. Therefore, our PRC subsidiary are able to pay dividends in foreign currencies to us without prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our company who are PRC residents. But approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

Failure to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.

We are required under PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. We have not made adequate employee benefit payments. We may be required to make up the contributions for these plans as well as to pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial condition and results of operations may be adversely affected.

The approval of the China Securities Regulatory Commission may be required in connection with this offering under a regulation adopted in August 2006, as amended, and, if required, we cannot predict whether we will be able to obtain such approval.

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in August 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the China Securities Regulatory Commission, or the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. In September 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by a special purpose vehicle seeking CSRC approval of its overseas listings. The application of the M&A Rules remains unclear.

Our PRC counsel, Han Kun Law Offices, has advised us based on their understanding of the current PRC laws, rules and regulations that the CSRC’s approval is not required for the listing and trading of our ADSs on the [NASDAQ Global Market/NYSE] in the context of this offering, given that:

 

    we established our PRC subsidiary, Heng Ye, by means of direct investment rather than by merger with or acquisition of PRC domestic companies; and

 

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    no explicit provision in the M&A Rules classifies the respective contractual arrangements between Heng Ye, Heng Cheng and its shareholders as a type of acquisition transaction falling under the M&A Rules.

However, there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and the CSRC’s opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do. If the CSRC or any other PRC regulatory agencies subsequently determines that we need to obtain the CSRC’s approval for this offering or if the CSRC or any other PRC government agencies promulgates any interpretation or implements rules before our listing that would require us to obtain CSRC or other governmental approvals for this offering, we may face adverse actions or sanctions by the CSRC or other PRC regulatory agencies. Sanctions may include fines and penalties on our operations in the PRC, limitations on our operating privileges in the PRC, delays in or restrictions on the repatriation of the proceeds from this offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiary, or other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt this offering before the settlement and delivery of the ADSs that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ADSs we are offering, you would be doing so at the risk that the settlement and delivery may not occur. In addition, if the CSRC or other PRC regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of the ADSs.

The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

The M&A Rules discussed in the preceding risk factor and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances that the MOC be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOC shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOC that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOC, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOC or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

PRC regulations relating to offshore investment activities by PRC residents may limit our PRC subsidiary’ ability to increase their registered capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under PRC law.

SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that

 

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requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or divisions. SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.

If our shareholders who are PRC residents or entities do not complete their registration as required, our PRC subsidiary may be prohibited from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

All of our shareholders who directly or indirectly hold shares in our Cayman Islands holding company and who are known to us as being PRC residents have completed the initial foreign exchange registrations and are in the process of updating their registrations required in connection with our recent corporate restructuring.

However, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary’ ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, replacing earlier rules promulgated in March 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiary of such overseas listed company, and complete certain other procedures. In addition, an overseas entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. If we adopt a share incentive plan, we and our executive officers and other employees who are PRC citizens or who have resided in the PRC for a continuous period of not less than one year and who have been granted options will be subject to these regulations when our company becomes an overseas listed company upon the completion of this offering. Failure to complete the SAFE registrations may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary and limit our PRC subsidiary’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Regulation—Regulations on Stock Incentive Plans.”

 

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If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners like us, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. See “Taxation—People’s Republic of China Taxation.” However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” As substantially all of our management members are based in China, it remains unclear how the tax residency rule will apply to our case. If the PRC tax authorities determine that Yirendai Ltd. or any of our subsidiaries outside of China is a PRC resident enterprise for PRC enterprise income tax purposes, then Yirendai Ltd. or such subsidiary could be subject to PRC tax at a rate of 25% on its world-wide income, which could materially reduce our net income. In addition, we will also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of our ADSs or ordinary shares may be subject to PRC tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs.

We may not be able to obtain certain benefits under relevant tax treaty on dividends paid by our PRC subsidiary to us through our Hong Kong subsidiary.

We are a holding company incorporated under the laws of the Cayman Islands and as such rely on dividends and other distributions on equity from our PRC subsidiary to satisfy part of our liquidity requirements. Pursuant to the PRC Enterprise Income Tax Law, a withholding tax rate of 10% currently applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Pursuant to the Arrangement between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, or the Double Tax Avoidance Arrangement, and Circular 81 issued by the State Administration of Taxation, such withholding tax rate may be lowered to 5% if the PRC enterprise is at least 25% held by a Hong Kong enterprise throughout the 12 months prior to distribution of the dividends and is determined by the relevant PRC tax authority to have satisfied other conditions and

 

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requirements under the Double Tax Avoidance Arrangement and other applicable PRC laws. Furthermore, the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties (For Trial Implementation), which became effective in October 2009, requires that non-resident enterprises must obtain approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. See “Taxation—People’s Republic of China Taxation.” The relevant PRC tax authority will conduct a comprehensive analysis and determine whether to grant approval on a case-by-case basis. We cannot assure you that we will be able to obtain the approval from the relevant PRC tax authority and enjoy the preferential withholding tax rate of 5% under the Double Taxation Arrangement with respect to dividends to be paid by Heng Ye, our PRC subsidiary to Yirendai HK, our Hong Kong subsidiary.

Enhanced scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue in the future.

The PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular 59 and Circular 698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in Circular 698, which became effective in February 2015.

Under Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect transfer may be subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value, the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.

In February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee (or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.

We face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become at risk of being subject to filing obligations or being taxed, under Circular 59 or Circular 698 and Circular 7, and may be required to expend valuable resources to comply with Circular 59, Circular 698 and Circular 7 or to establish that we and our

 

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non-resident enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

The PRC tax authorities have the discretion under SAT Circular 59, Circular 698 and Circular 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. Although we currently have no plans to pursue any acquisitions in China or elsewhere in the world, we may pursue acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under SAT Circular 59 or Circular 698 and Circular 7, our income tax costs associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.

The audit report included in this prospectus is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, our investors are deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit reports included in our prospectus filed with the U.S. Securities and Exchange Commission, as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the Peoples’ Republic of China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

If additional remedial measures are imposed on the “big four” PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging such firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

Starting in 2011 the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S. listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese accounting firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.

In late 2012 this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. In January 2014, the administrative law judge reached an

 

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initial decision to impose penalties on the firms including a temporary suspension of their right to practice before the SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the commissioners of the SEC had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adversely affected.

If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delay or abandonment of this offering, delisting of our ordinary shares from the [NASDAQ Global Market/NYSE] or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Risks Related to This Offering and our American Depositary Shares

There has been no public market for our ordinary shares or ADSs prior to this offering, and you may not be able to resell our ADSs 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 or ADSs. We intend to list our ADSs on the [NASDAQ Global Market/NYSE]. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.

Negotiations with the underwriters will determine the initial public offering price for our ADSs 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 ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.

The market price for our ADSs may be volatile.

The trading prices of our ADSs 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 other listed 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 price declines in their trading prices. The trading performances of other Chinese companies’ securities after their offerings, including internet and e-commerce companies, may affect the attitudes of investors toward Chinese companies listed in the United States, which consequently may impact the

 

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trading performance of our ADSs, 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 Chinese companies may also negatively affect the attitudes of investors towards Chinese 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, such as the large decline in share prices in the United States, China and other jurisdictions in late 2008, early 2009 and the second half of 2011, which may have a material adverse effect on the market price of our ADSs.

In addition to the above factors, the price and trading volume of our ADSs may be highly volatile due to multiple factors, including the following:

 

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

 

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

 

    changes in the economic performance or market valuations of other online consumer finance marketplaces;

 

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

 

    changes in financial estimates by securities research analysts;

 

    conditions in the internet and unsecured consumer finance industries;

 

    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;

 

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

 

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

 

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

 

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

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

The trading market for our ADSs 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 ADSs or publish inaccurate or unfavorable research about our business, the market price for our ADSs 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 ADSs to decline.

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

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of US$             per ADS, representing the difference between the assumed initial public offering price of US$             per ADS, the midpoint of the estimated range of the initial public offering price,

 

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and our net tangible book value per ADS as of March 31, 2015, after giving effect to the net proceeds to us from this offering. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of any share options. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon completion of this offering.

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our ADSs for return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has discretion as to whether to distribute dividends, subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts at they fall due in the ordinary course of business. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiary, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

Substantial future sales or perceived potential sales of our ADSs in the public market could cause the price of our ADSs to decline.

Sales of our ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Immediately after the completion of this offering, we will have ordinary shares outstanding including              ordinary shares represented by ADSs, assuming the underwriters do not exercise their over-allotment option. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act. The remaining ordinary shares outstanding after this offering will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. Any or all of these shares may be released prior to the expiration of the lock-up period at the discretion of the representatives of the underwriters of this offering. To the extent shares are released before the expiration of the lock-up period and sold into the market, the market price of our ADSs could decline.

After completion of this offering, certain holders of our ordinary shares may cause us to register under the Securities Act the sale of their shares, subject to the 180-day lock-up period in connection with this offering. Registration of these shares under the Securities Act would result in ADSs representing these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the form of ADSs in the public market could cause the price of our ADSs to decline.

You, as holders of ADSs, may have fewer rights than holders of our ordinary shares and must act through the depositary to exercise those rights.

Holders of ADSs do not have the same rights as our shareholders and may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under

 

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the post-offering memorandum and articles of association that we expect to adopt and to become effective immediately prior to the completion of this offering, the minimum notice period required to convene a general meeting is seven days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw the shares underlying your ADSs to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if the shares underlying your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.

The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.

Under the deposit agreement for our ADSs, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings if you do not give voting instructions to the depositary, unless:

 

    we have failed to timely provide the depositary with our notice of meeting and related voting materials;

 

    we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

    we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

    a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

    voting at the meeting is made on a show of hands.

The effect of this discretionary proxy is that, if you fail to give voting instructions to the depositary, you cannot prevent our ordinary shares underlying your ADSs from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence our management. Holders of our ordinary shares are not subject to this discretionary proxy.

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make such rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings in the future and may experience dilution in your holdings.

You may not receive cash dividends if the depositary decides it is impractical to make them available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You

 

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will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

Certain judgments obtained against us by our shareholders may not be enforceable.

We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, a majority of our directors and executive officers reside within China, and most of the assets of these persons are located within China. As a result, it may be difficult or impossible for you to effect service of process within the United States upon these individuals, or to bring an action against us or against these individuals in the United States in the event that you believe your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2013 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands 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 Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors will have discretion under the post-offering memorandum and articles of association we expect to adopt, to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder resolution or to solicit proxies from other shareholders in connection with a proxy contest.

 

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As a result of all of the above, our 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 public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law (2013 Revision) of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase our ADS price.

A significant portion of the net proceeds of this offering is allocated for general corporate purposes, which may include working capital needs and potential acquisitions, partnerships and alliances. Our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. The net proceeds may be used for corporate purposes that do not improve our efforts to achieve or maintain profitability or increase our ADS price. The net proceeds from this offering may be placed in investments that do not produce income or that lose value.

The post-offering memorandum and articles of association that we expect to adopt and to become effective immediately prior to the completion of this offering will contain anti-takeover provisions that could discourage a third party from acquiring us and adversely affect the rights of holders of our ordinary shares and ADSs.

We expect to adopt, subject to the approval by our shareholders, an amended and restated memorandum and articles of association that will become effective immediately prior to the completion of this offering. The post-offering memorandum and articles of association will contain certain provisions that could limit the ability of others to acquire control of our company, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our shareholders and ADSs holders of the opportunity to sell their shares or ADSs at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.

We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes-Oxley Act of 2002 for so long as we are an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

 

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We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.

Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

    the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

 

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

 

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

 

    the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the [NASDAQ Global Market/NYSE]. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the [NASDAQ Global Market/NYSE] corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the [NASDAQ Global Market/NYSE] corporate governance listing standards.

As a Cayman Islands company listed on the [NASDAQ Global Market/NYSE], we are subject to the [NASDAQ Global Market/NYSE] corporate governance listing standards. However, [NASDAQ Global Market/ NYSE] rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the [NASDAQ Global Market/NYSE] corporate governance listing standards. Currently, we do not plan to rely on home country practice with respect to our corporate governance after we complete this offering. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would enjoy under the [NASDAQ Global Market/NYSE] corporate governance listing standards applicable to U.S. domestic issuers.

There can be no assurance that we will not be passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year, which could subject United States investors in our ADSs or ordinary shares to significant adverse United States income tax consequences.

We will be a “passive foreign investment company,” or “PFIC,” if, in any particular taxable year, either (a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the average quarterly value of our assets (as determined on the basis of fair market value) during such year produce or are held for the production of passive income (the “asset test”). Although the law in this regard is unclear, we intend to treat Heng Cheng as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entity but also because we are entitled to substantially all of its economic benefits, and, as a result, we consolidate its results of operations in our consolidated financial statements. Assuming that we are the owner of Heng Cheng for United States federal

 

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income tax purposes, and based upon our current and expected income and assets, including goodwill, (taking into account the expected proceeds from this offering) and projections as to the value of our ADSs and ordinary shares following the offering, we do not presently expect to be a PFIC for the current taxable year or the foreseeable future.

While we do not expect to become a PFIC, because the value of our assets for purposes of the asset test may be determined by reference to the market price of our ADSs or ordinary shares, fluctuations in the market price of our ADSs or ordinary shares may cause us to become a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets, which may be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. If we determine not to deploy significant amounts of cash for active purposes or if it were determined that we do not own the stock of Heng Cheng for United States federal income tax purposes, our risk of being a PFIC may substantially increase. Because there are uncertainties in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

If we are a PFIC in any taxable year, a U.S. holder (as defined in “Taxation—United States Federal Income Tax Considerations”) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the United States federal income tax rules and such holder may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. holder holds our ADSs or ordinary shares. For more information see “Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Considerations.”

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and [NASDAQ Global Market/NYSE], impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.0 billion in net revenues 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 and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to “opt out” of the provision that allow us to delay adopting new or revised accounting standards and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur

 

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additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that reflect our current expectations and views of future events. The forward looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

 

    our goals and strategies;

 

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

 

    the expected growth of the online consumer finance marketplace market in China;

 

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

 

    our expectations regarding our relationships with investors and borrowers;

 

    competition in our industry; and

 

    relevant government policies and regulations relating to our industry.

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,” “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. Statistical data in these publications also include projections based on a number of assumptions. Our 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 ADSs. In addition, the rapidly changing nature of the online consumer finance marketplace industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. 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 this offering of approximately US$            , or approximately US$             if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and the estimated offering expenses payable by us. These estimates are based upon an assumed initial public offering price of US$             per ADS, the midpoint of the price range shown on the front cover page of this prospectus. A $1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS would increase (decrease) the net proceeds to us from this offering by US$            , assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

We plan to use the net proceeds of this offering primarily for general corporate purposes, which may include investment in product development, sales and marketing activities, technology infrastructure, capital expenditures, improvement of corporate facilities and other general and administrative matters. We may also use a portion of these proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments.

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this 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. See “Risk Factors—Risks Related to This Offering and our American Depositary Shares—You must rely on the judgment of our management as to the use of the net proceeds from this offering, and such use may not produce income or increase our ADS price.”

Pending any use described above, we plan to invest the net proceeds in short-term, interest-bearing, debt instruments or demand deposits.

In using the proceeds of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our wholly foreign-owned subsidiary in China only through loans or capital contributions and to our consolidated variable interest entity only through loans, subject to the approval of government authorities and limit on the amount of capital contributions and loans. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our wholly foreign-owned subsidiary in China or make additional capital contributions to our wholly-foreign-owned subsidiary to fund its capital expenditures or working capital. For an increase of registered capital of our wholly foreign-owned subsidiary, we need to obtain approval from the MOC or its local counterparts, which will decide within 90 days after receiving the application. If we provide funding to our wholly foreign-owned subsidiary through loans, the total amount of such loans may not exceed the difference between the entity’s total investment as approved by the foreign investment authorities and its registered capital. Such loans must be registered with SAFE or its local branches, which usually takes up to 20 working days to complete. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Our Corporate Structure—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

[We will not receive any of the proceeds from the sale of ADSs by the selling shareholders.]

 

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DIVIDEND POLICY

Our board of directors has discretion on whether to distribute dividends, subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Regulation—Regulations on Dividend Distribution” and “Taxation—People’s Republic of China Taxation.”

If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2015:

 

    on an actual basis;

 

    on an as adjusted basis to reflect the sale of              ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise the over-allotment option.

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of March 31, 2015
     Actual     As Adjusted(2)
     (in US$ thousands)

Equity:

    

Ordinary shares, US$0.0001 par value, 500,000,000 shares authorized,
10,000 shares issued and outstanding on an actual basis and              ordinary shares outstanding on an as adjusted basis(1)

     —       

Additional paid-in capital(3)

     50,910     

Accumulated other comprehensive loss

     (181  

Accumulated deficit

     (7,007  

Total equity(3)

     43,722     
  

 

 

   

 

Total capitalization(3)

  43,722   
  

 

 

   

 

Notes:

 

(1) On January 5, 2015, we effected a 10,000-for-1 share split whereby each of our issued and outstanding ordinary shares of a par value of US$1.00 each was divided into 10,000 ordinary shares of a par value of US$0.0001 each, and the number of our authorized shares was increased from 50,000 to 500,000,000. The share split has been retroactively reflected for all periods presented herein.
(2) The as adjusted information discussed above is illustrative only. Our additional paid-in capital, total shareholders’ equity and total capitalization following the completion of this offering are subject to adjustment based on the actual public offering price and other terms of this offering determined at pricing.
(3) Assuming the number of ADSs offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions and the estimated offering expenses payable by us, a $1.00 increase (decrease) in the assumed public offering price of $             per ADS would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by $             million.

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares.

Our net tangible book value as of March 31, 2015 was approximately US$771,000, or US$             per ordinary share as of that date and US$             per ADS. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting net tangible book value per ordinary share, after giving effect to the additional proceeds we will receive from this offering, from the assumed initial public offering price of US$             per ordinary share, which is the midpoint of the estimated initial public offering price range set forth on the cover page of this prospectus adjusted to reflect the ADS-to-ordinary share ratio, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in net tangible book value after March 31, 2015, other than to give effect to our sale of the ADSs offered in this offering at the assumed initial public offering price of US$             per ADS, the midpoint of the estimated range of the initial public offering price, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value as of March 31, 2015 would have been US$            , or US$             per ordinary share and US$             per ADS. This represents an immediate increase in net tangible book value of US$             per ordinary share and US$             per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$             per ordinary share and US$             per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 

     Per Ordinary Share      Per ADS  

Assumed initial public offering price

   US$                    US$                

Net tangible book value as of March 31, 2015

   US$                    US$                

As adjusted net tangible book value after giving effect to this offering

   US$                    US$                

Amount of dilution in net tangible book value to new investors in this offering

   US$                    US$                

A $1.00 increase (decrease) in the assumed public offering price of US$             per ADS would increase (decrease) our as adjusted net tangible book value after giving effect to this offering by US$            , the as adjusted net tangible book value per ordinary share and per ADS after giving effect to this offering by US$             per ordinary share and US$             per ADS and the dilution in as adjusted net tangible book value per ordinary share and per ADS to new investors in this offering by US$             per ordinary share and US$             per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses.

 

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The following table summarizes, on an as adjusted basis as of March 31, 2015, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters.

 

     Ordinary Shares
Purchased
   Total Consideration     Average
Price Per
Ordinary
Share
     Average
Price Per
ADS
 
     Number    Percent    Amount      Percent       

Existing shareholders

         US$                                     US$                    US$                

New investors

         US$               US$         US$     
  

 

  

 

  

 

 

    

 

 

      

Total

US$        100.0
  

 

  

 

  

 

 

    

 

 

      

The as adjusted information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as:

 

    political and economic stability;

 

    an effective judicial system;

 

    a favorable tax system;

 

    the absence of exchange control or currency restrictions; and

 

    the availability of professional and support services.

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include, but are not limited to:

 

    the Cayman Islands has a less developed body of securities laws as compared to the United States and these securities laws provide significantly less protection to investors as compared to the United States; and

 

    Cayman Islands companies may not have standing to sue before the federal courts of the United States.

Our constituent documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

Substantially all of our operations are conducted in China, and substantially all of our assets are located in China. A majority of our directors and executive officers are nationals or residents of jurisdictions other than the United States and most of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these individuals, or to bring an action against us or against these individuals in the United States, in the event that you believe that your rights have been infringed under the securities laws of the United States or any state in the United States.

We have appointed                     , located at                     as our agent upon whom process may be served in any action brought against us under the securities laws of the United States.

Maples and Calder, our legal counsel as to Cayman Islands law, and Han Kun Law Offices, our legal counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and China, respectively, would:

 

    recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States; or

 

    entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

There is uncertainty with regard to Cayman Islands law relates to whether a judgment obtained from the United States courts under civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman company. Because the courts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in the Cayman Islands. Maples and Calder has advised us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States, a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at

 

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common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment:

 

    is given by a foreign court of competent jurisdiction;

 

    imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given;

 

    is final;

 

    is not in respect of taxes, a fine or a penalty; and

 

    was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

Han Kun Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against us in the PRC, if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit. However, it would be difficult for foreign shareholders to establish sufficient nexus to the PRC by virtue only of holding our ADSs or ordinary shares.

 

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CORPORATE HISTORY AND STRUCTURE

We commenced our online consumer finance marketplace business in March 2012 as a business unit under our parent company, CreditEase, which will remain our parent company and controlling shareholder after this offering. CreditEase incorporated Yirendai Ltd. in the Cayman Islands to be our holding company in September 2014. Yirendai Ltd. then established a wholly owned subsidiary in Hong Kong, Yirendai Hong Kong Limited, or Yirendai HK, in October 2014, and Yirendai HK further established Yi Ren Heng Ye Technology Development (Beijing) Co., Ltd., or Heng Ye, our wholly owned subsidiary in China, in January 2015.

Heng Cheng Technology Development (Beijing) Co., Ltd., or Heng Cheng, was established in China in September 2014. Mr. Ning Tang, Mr. Fanshun Kong and Ms. Yan Tian are the shareholders of Heng Cheng designated by CreditEase, owning 40%, 30% and 30% of the equity interest in Heng Cheng, respectively, as of the date of this prospectus. We obtained control and became the primary beneficiary of Heng Cheng in February 2015 by entering into a series of contractual arrangements with Heng Cheng and its shareholders.

As a result of restructuring by CreditEase, we currently conduct our online consumer finance marketplace business in China through Heng Ye and our consolidated variable interest entity, Heng Cheng. Heng Cheng operates our website www.yirendai.com and has an ICP license as an internet information provider.

The following diagram illustrates our corporate structure, including our subsidiaries and consolidated variable interest entity, immediately upon the completion of this offering, assuming the underwriters do not exercise their over-allotment option:

 

LOGO

 

LOGO         Equity interest

LOGO         Contractual arrangements

 

(1) The shareholders of Heng Cheng are Ning Tang, Fanshun Kong and Yan Tian, owning 40%, 30% and 30% of Heng Cheng’s equity interest, respectively. Mr. Ning Tang is our executive chairman, Mr. Fanshun Kong is a non-executive PRC employee of CreditEase, and Ms. Yan Tian is a third-party individual designated by CreditEase.

 

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Contractual Arrangements with Heng Cheng

Due to PRC legal restrictions on foreign ownership and investment in value-added telecommunications services, or the internet content provision services in particular, we currently conduct these activities through Heng Cheng, which we effectively control through a series of contractual arrangements. These contractual arrangements allow us to:

 

    exercise effective control over Heng Cheng;

 

    receive substantially all of the economic benefits of Heng Cheng; and

 

    have an exclusive option to purchase all or part of the equity interests in Heng Cheng when and to the extent permitted by PRC law.

As a result of these contractual arrangements, we have become the primary beneficiary of Heng Cheng designated by CreditEase, and we treat Heng Cheng as our variable interest entity under U.S. GAAP. We have consolidated the financial results of Heng Cheng in our consolidated financial statements in accordance with U.S. GAAP.

The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Heng Ye, our consolidated variable interest entity, Heng Cheng, and the shareholders of Heng Cheng.

Agreements that Provide us Effective Control over Heng Cheng

Equity Interest Pledge Agreements. Pursuant to the equity interest pledge agreements, each shareholder of Heng Cheng has pledged all of his or her equity interest in Heng Cheng to guarantee the shareholder’s and Heng Cheng’s performance of their obligations under the exclusive business cooperation agreement, loan agreement, exclusive option agreement and power of attorney. If Heng Cheng or any of its shareholders breaches their contractual obligations under these agreements, Heng Ye, as pledgee, has the right to dispose of the pledged equity interests. Each of the shareholders of Heng Cheng agrees that, during the term of the equity interest pledge agreements, he or she will not dispose of the pledged equity interests or create or allow any encumbrance on the pledged equity interests without the prior written consent of Heng Ye. The equity interest pledge agreements remain effective until Heng Cheng and its shareholders discharge all their obligations under the contractual arrangements. We have registered the equity pledge with the relevant office of the administration for industry and commerce in accordance with the PRC Property Rights Law.

Powers of Attorney. Pursuant to the powers of attorney, each shareholder of Heng Cheng has irrevocably appointed Heng Ye to act as such shareholder’s exclusive attorney-in-fact to exercise all shareholder rights, including but not limited to voting on all matters of Heng Cheng requiring shareholder approval, disposing of all or part of the shareholder’s equity interest in Heng Cheng, and appointing directors and executive officers. Heng Ye is entitled to designate any person to act as such shareholder’s exclusive attorney-in-fact without notifying or the approval of such shareholder, and if required by PRC law, Heng Ye should designate a PRC citizen to exercise such right. Each power of attorney will remain in force for so long as the shareholder remains a shareholder of Heng Cheng. Each shareholder has waived all the rights which have been authorized to Heng Ye and will not exercise such rights.

Agreement that Allows us to Receive Economic Benefits from Heng Cheng

Exclusive Business Cooperation Agreement. Under the exclusive business cooperation agreement between Heng Ye and Heng Cheng, Heng Ye has the exclusive right to provide Heng Cheng technical support, consulting services and other services. Without Heng Ye’s prior written consent, Heng Cheng agrees not to accept the same or any similar services provided by any third party. Heng Ye may designate other parties to provide services to Heng Cheng. Heng Cheng agrees to pay service fees on a monthly basis and at an amount determined by Heng Ye after taking into account multiple factors, such as complexity and difficulty of the services provided, the time consumed, the content and commercial value of services provided and the market price of comparable services. Heng Ye owns the intellectual property rights arising out of the performance of this agreement. In addition, Heng Cheng irrevocably grants Heng Ye an irrevocable and exclusive option to purchase any or all of the assets and

 

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businesses of Heng Cheng at the lowest price permitted under PRC law. Unless otherwise agreed by the parties or terminated by Heng Ye unilaterally, this agreement will remain effective permanently.

Agreements that Provide Us with the Option to Purchase the Equity Interest in Heng Cheng

Exclusive Option Agreement. Pursuant to the exclusive option agreements, each shareholder of Heng Cheng has irrevocably granted Heng Ye an exclusive option to purchase, or have its designated person or persons to purchase, at its discretion, to the extent permitted under PRC law, all or part of the shareholder’s equity interests in Heng Cheng. The purchase price is equal to the higher of the amount of loan extended by Heng Ye to each shareholder of Heng Cheng under the respective loan agreement or the minimum price required by PRC law. If Heng Ye exercises the option to purchase part of the equity interest held by a shareholder, the purchase price shall be calculated proportionally. Heng Cheng and each of its shareholders agree to appoint any persons designated by Heng Ye to act as Heng Cheng’s directors. Without Heng Ye’s prior written consent, Heng Cheng should not amend its articles of associate, increase or decrease the registered capital, sell or otherwise dispose of its assets or beneficial interest, create or allow any encumbrance on its assets or other beneficial interests, provide any loans for any third parties, enter into any material contract with a value of more than RMB100,000 (US$16,132) (except those contracts entered into in the ordinary course of business), merge with or acquire any other persons or make any investments, or distribute dividends to the shareholders. The shareholders of Heng Cheng agree that, without Heng Ye’s prior written consent, they will not dispose of their equity interests in Heng Cheng or create or allow any encumbrance on the equity interests. Moreover, without Heng Ye’s prior written consent, no dividend will be distributed to Heng Cheng’s shareholders, and if any of the shareholders receives any profit, interest, dividend or proceeds of share transfer or liquidation, the shareholder must give such profit, interest, dividend and proceeds to Heng Ye. These agreements will remain effective until all equity interests of Heng Cheng held by its shareholders have been transferred or assigned to Heng Ye or its designated person(s).

Loan Agreements. Pursuant to the loan agreements between Heng Ye and the shareholders of Heng Cheng, Heng Ye made loans in an aggregate amount of RMB30 million (US$4.8 million) to the shareholders of Heng Cheng solely for the capitalization of Heng Cheng. Pursuant to the loan agreement, the shareholders can only repay the loans by the sale of all their equity interest in Heng Cheng to Heng Ye or its designated person(s) pursuant to their respective exclusive option agreements. The shareholders must pay all of the proceeds from sale of such equity interests to Heng Ye. In the event that shareholders sell their equity interests to Heng Ye or its designated person(s) with a price equivalent to or less than the amount of the principal, the loans will be interest free. If the price is higher than the amount of the principal, the excess amount will be paid to Heng Ye as the loan interest. The maturity date of the loans is ten years following the date of the loan agreement, and may be extended by mutual agreement. The loan must be repaid immediately under certain circumstances, including, among others, if a foreign investor is permitted to hold majority or 100% equity interest in Heng Cheng and Heng Ye elects to exercise its exclusive equity purchase option. The term of the loans is ten years and can be extended upon mutual written consent of the parties.

In the opinion of Han Kun Law Offices, our PRC counsel:

 

    the ownership structures of Heng Ye and Heng Cheng, currently and immediately after giving effect to this offering, will not result in any violation of PRC laws or regulations currently in effect; and

 

    the contractual arrangements among Heng Ye, Heng Cheng and the shareholders of Heng Cheng governed by PRC law, currently and immediately after giving effect to this offering, are valid, binding and enforceable, and do not 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. In particular, in January 2015, the MOC published a discussion draft of the proposed Foreign Investment Law for public review and comments. 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, or an FIE. Under the draft Foreign Investment Law, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled” by

 

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foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not taken a position on what actions will be taken with respect to the existing companies with the “variable interest entity” structure, whether or not these companies are controlled by Chinese parties. It is uncertain when the draft would be signed into law and whether the final version would have any substantial changes from the draft. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the above opinion of our PRC counsel. If the PRC government finds that the agreements that establish the structure for operating our online consumer finance marketplace business do not comply with PRC government restrictions on foreign investment in value-added telecommunications services business, such as the internet content provision services, we could be subject to severe penalties, including being prohibited from continuing operations. See “Risk Factors—Risks Related to Our Corporate Structure—If the PRC government deems that the contractual arrangements in relation to our consolidated variable interest entity do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations,” “Risk Factors—Risks Related to Doing Business in China—We may be adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations,” “Risk Factors—Risks Related to Doing Business in China—Uncertainties in the interpretation and enforcement of Chinese laws and regulations could limit the legal protections available to us,” and “Risk Factors—Risks Related to Doing Business in China—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.”

 

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OUR RELATIONSHIP WITH CREDITEASE

We are a wholly-owned subsidiary of CreditEase as of the date of this prospectus. Upon the completion of this offering, CreditEase will remain our parent company and controlling shareholder, with a shareholding of             % of our then outstanding ordinary shares assuming the underwriters do not exercise their over-allotment option. Prior to the establishment of Yirendai Ltd., our business was carried out by various subsidiaries and variable interest entities of CreditEase. We completed our carve-out from CreditEase in the first quarter of 2015, and all of our online consumer finance marketplace business is carried out by our own subsidiaries and consolidated variable interest entity.

In the past, CreditEase provided us with origination and servicing, financial, administrative, sales and marketing, risk management, human resources and legal services, as well as the services of a number of its executives and employees, the costs of which were allocated to us using a proportional cost allocation method and based on headcount or transaction volume for the provision of services attributable to us. Although we intend to set up support systems of our own, we expect CreditEase to continue to provide certain support services during a transitional period after we become a stand-alone public company.

Prior to the completion of this offering, we plan to enter into a series of agreements with CreditEase with respect to various ongoing relationships between us. These agreements include a master transaction agreement, a transitional service agreement, a non-competition agreement, a cooperation framework agreement and an intellectual property license agreement. The following are summaries of these agreements. For the complete text of these agreements, please see the copies to be included as exhibits to the registration statement filed with the SEC of which this prospectus is a part.

Master Transaction Agreement

The master transaction agreement contains provisions relating to our carve-out from CreditEase. Pursuant to this agreement, we are responsible for all financial liabilities associated with the current and historical online consumer finance marketplace business and operations that have been conducted by or transferred to us, and CreditEase is responsible for financial liabilities associated with all of CreditEase’s other current and historical businesses and operations, in each case regardless of the time those liabilities arise. The master transaction agreement also contains indemnification provisions under which we and CreditEase agree to indemnify each other with respect to breaches of the master transaction agreement or any related inter-company agreement.

In addition, we agree to indemnify CreditEase against liabilities arising from misstatements or omissions in this prospectus or the registration statement of which it is a part, except for misstatements or omissions relating to information that CreditEase provided to us specifically for inclusion in this prospectus or the registration statement of which it forms a part. We also agree to indemnify CreditEase against liabilities arising from any misstatements or omissions in our subsequent SEC filings and from information we provide to CreditEase specifically for inclusion in CreditEase’s annual reports or other SEC filings, if any, following the initial filing of the registration statement with the SEC of which this prospectus is a part, but only to the extent that the information pertains to us or our business or to the extent CreditEase provides us prior written notice that the information will be included in its annual reports or other subsequent SEC filings, if any, and the liability does not result from the action or inaction of CreditEase. Similarly, CreditEase will indemnify us against liabilities arising from misstatements or omissions in its subsequent SEC filings, if any, or with respect to information that CreditEase provided to us specifically for inclusion in this prospectus, the registration statement of which this prospectus forms a part, or our annual reports or other SEC filings following the initial filing of the registration statement with the SEC of which this prospectus is a part, but only to the extent that the information pertains to CreditEase or CreditEase’s business or to the extent we provide CreditEase prior written notice that the information will be included in our annual reports or other SEC filings, and the liability does not result from our action or inaction.

 

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The master transaction agreement also contains a general release, under which the parties will release each other from any liabilities arising from events occurring on or before the initial filing date of the registration statement of which this prospectus forms a part, including in connection with the activities to implement this offering. The general release does not apply to liabilities allocated between the parties under the master transaction agreement or the other inter-company agreements.

Furthermore, under the master transaction agreement, we agree to use our reasonable best efforts to engage the same independent certified public accounting firm selected by CreditEase and to maintain the same fiscal year as CreditEase until the first CreditEase fiscal year-end following the earlier of (i) the first date when CreditEase no longer owns at least 20% of the voting power of our then outstanding securities and (ii) the first date when CreditEase ceases to be the largest beneficial owner of our then outstanding voting securities (without considering holdings by certain institutional investors). We refer to this earlier date as the control ending date. We also agree to use our reasonable best efforts to complete our audit and provide CreditEase with all financial and other information on a timely basis so that CreditEase may meet its deadlines for its filing of annual and quarterly financial statements, if applicable.

The master transaction agreement will automatically terminate five years after the control ending date. This agreement can be terminated early or extended by mutual written consent of the parties. The termination of this agreement will not affect the validity and effectiveness of the transitional services agreement, the non-competition agreement, the cooperation framework agreement and the intellectual property license agreement.

Transitional Services Agreement

Under the transitional services agreement, CreditEase agrees that, during the service period, as described below, CreditEase will provide us with various corporate support services, including but not limited to:

 

    operational management support;

 

    administrative support;

 

    legal support;

 

    human resources support; and

 

    accounting, internal control and internal audit support.

CreditEase also may provide us with additional services that we and CreditEase may identify from time to time in the future.

The price to be paid for the services provided under the transitional service agreement will be the actual direct and indirect costs of providing such services. Direct costs include compensation and travel expenses attributable to employees, temporary workers, and contractors directly engaged in performing the services, as well as materials and supplies consumed in and agency fees arising from performing the services. Indirect costs include occupancy, information technology support and other overhead costs of the department incurring the direct costs of providing the services.

The transitional service agreement provides that the performance of a service according to the agreement will not subject the provider of such service to any liability whatsoever except as directly caused by the gross negligence or willful misconduct of the service provider. Liability for gross negligence or willful misconduct is limited to the lower of the price paid for the particular service or the cost of the service’s recipient performing the service itself or hiring a third party to perform the service. Under the transitional services agreement, the service provider of each service is indemnified by the recipient against all third-party claims relating to provision of services or the recipient’s material breach of a third-party agreement, except where the claim is directly caused by the service provider’s gross negligence or willful misconduct.

 

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The service period under the transitional services agreement commences on the date of signing and will end on the earlier of the fifth anniversary of the completion of this offering and one year after the control ending date. We may terminate the transitional services agreement with respect to either all or part of the services by giving 90-day prior written notice to CreditEase and paying all fees accrued through the termination and costs actually incurred by CreditEase resulting from the early termination. Upon the control ending date, CreditEase may terminate this agreement with respect to either all or part of the services by giving us a 90-day prior written notice.

Non-competition Agreement

Our non-competition agreement with CreditEase provides for a non-competition period beginning upon the completion of this offering and ending on the earlier of (i) one year after the control ending date and (ii) the fifteenth anniversary of the completion of this offering. This agreement can be terminated early by mutual written consent of the parties.

CreditEase agrees not to compete with us during the non-competition period in any business that is of the same nature as (i) the online consumer finance marketplace business conducted or contemplated to be conducted by us as of the date of the agreement and (ii) other businesses that we and CreditEase may mutually agree from time to time, except for owning a non-controlling equity interest in any company competing with us. We agree not to compete with CreditEase during the non-competition period in the businesses conducted by CreditEase, other than (i) the online consumer finance marketplace business currently conducted or contemplated to be conducted by us as of the date of the agreement and (ii) other businesses that we and CreditEase may mutually agree from time to time, except for owning non-controlling equity interest in any company competing with CreditEase.

The non-competition agreement also provides for a mutual non-solicitation obligation that neither CreditEase nor we may, during the non-competition period, hire or solicit for hire, any active employees of or individuals providing consulting services to the other party, or any former employees of or individuals providing consulting services to the other party within six months of the termination of their employment or consulting services, without the other party’s consent, except for solicitation activities through generalized non-targeted advertisement not directed to such employees or individuals that do not result in a hiring within the non-competition period.

Cooperation Framework Agreement

Under the cooperation framework agreement, CreditEase agrees to provide us long-term services and support in terms of offline user acquisition, collection and technical support. In terms of borrower acquisition, we will submit our request for borrower leads to CreditEase on a monthly basis and CreditEase will direct borrowers who fall within our target borrower group to our online marketplace. As for investor acquisition, CreditEase will, at its discretion, direct to us or share information on any investors it learns may be interested in our online marketplace. The rate of fees, if any, charged by one party to the other party under the cooperation contemplated by this agreement shall not be higher than the fee rate charged by or to any unrelated third party. This agreement will be effective on the date of completion of this offering and expire on the earlier of (i) the fifteenth anniversary of the commencement of the cooperation period or (ii) one year after the control ending date.

Intellectual Property License Agreement

Under the intellectual property license agreement, CreditEase and we grant to each other and each party’s respective subsidiaries and VIE(s) a worldwide, royalty-free, fully paid-up, non-sublicensable, non-transferable, limited, non-exclusive license of intellectual property owned by the licensing party to use, reproduce, modify, prepare derivative works of, perform, display, or otherwise exploit, except for certain trademarks with regard to which CreditEase agrees to grant us a worldwide, royalty-free, fully paid-up, sublicensable, transferable, unlimited and exclusive license to use, reproduce, modify, prepare derivative works of, perform, display,

 

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sublicense, transfer or otherwise exploit, until and unless such trademarks are transferred to our company or any of our subsidiaries or consolidated variable interest entity.

CreditEase and we also agree, to the extent permitted under applicable laws and regulations, to cooperate in sharing information and data collected from each party’s business operation, including without limitation borrower and investor information and credit and loan data, as reasonably requested by the requesting party. This information sharing is free of charge unless otherwise mutually agreed in writing.

This agreement will be effective on the date of completion of this offering and expire on the earlier of (i) the fifteenth anniversary of the commencement of the cooperation period or (ii) one year after the control ending date.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statements of operations for the years ended December 31, 2013 and December 31, 2014, and selected consolidated balance sheet as of December 31, 2013 and December 31, 2014 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our audited consolidated financial statements are prepared and presented in accordance with U.S. GAAP. The following selected consolidated statement of operations for the three months ended March 31, 2014 and 2015 and the selected consolidated balance sheet as of March 31, 2015 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements. Our historical results do not necessarily indicate results expected for any future periods. You should read this Selected Consolidated Financial 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.

 

    For the Year Ended December 31,     For the
Three Months Ended March 31,
 
    2013     2014     2014     2015  
    (in US$ thousands, except for share, per share and per ADS data)  

Selected Consolidated Statements of Operations:

       

Net Revenue:

       

Transaction fees

    3,045        31,317        2,030        33,808   

Service fees

    25        405        23        1,215   

Others

    61        171        26        112   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

  3,131      31,893      2,079      35,135   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

Sales and marketing

  5,220      22,354      3,358      17,666   

Origination and servicing

  1,255      3,541      662      2,044   

General and administrative

  4,998      10,490      1,766      5,214   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

  (11,473   (36,385   (5,786   (24,924
 

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

  —        —        —        11   
 

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before provision for income taxes

  (8,342   (4,492   (3,707   10,222   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

  —        (5   —        (2,580
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income

  (8,342   (4,497   (3,707   7,642   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of ordinary shares used in per share calculations:

Basic and diluted

  10,000      10,000      10,000      10,000   

Net (loss)/income per ordinary share

Basic and diluted

  (834   (450   (371   764   

Net (loss)/income per ADS(1)

Basic

Diluted

 

(1) Each ADS represents              ordinary shares.

 

     As of December 31,      As of
March 31,
 
     2013      2014      2015  
     (in US$ thousands)  

Selected Consolidated Balance Sheet:

        

Accounts receivable

     3,077         25,971         22,721   

Total assets

     4,933         64,825         110,644   

Total liabilities

     1,775         28,813         66,922   

Total equity

     3,158         36,012         43,722   

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements.”

Overview

We are China’s largest online consumer finance marketplace connecting investors and individual borrowers as measured by transaction value in 2014, according to iResearch. We facilitated over RMB4,113.1 million (US$663.5 million) in loans from our inception in March 2012 through March 31, 2015. Our online platform automates key aspects of our operations and enables us to efficiently match borrowers with investors and facilitate and execute loan transactions. Our borrowers and investors come from a variety of channels, including online sources, such as through the internet and our mobile applications, as well as offline sources, such as referrals from CreditEase’s on-the-ground sales network.

We currently target prime borrowers, comprising credit card holders with salary income. We strategically focus on prime borrowers as we believe members of this group tend to more creditworthy and more receptive to internet finance solutions. Our online marketplace offers qualified borrowers quick and convenient access to credit at competitive prices.

Our online marketplace provides investors with attractive risk-adjusted returns from a quality asset class with investment thresholds as low as RMB100 (US$16.1). Investors have the option to individually select specific loans to invest in or to use our automated investing tool to identify and select loans on the basis of a targeted return. We also offer investors a credit enhancement service in the form of a risk reserve fund and provide a liquid secondary market for investors.

We generate revenues primarily from fees charged for our services in matching investors with individual borrowers and for other services we provide over the life of a loan. Our revenues include transaction fees, service fees and other revenues, with the majority of our historical revenues coming from transaction fees. We serve as an information intermediary, and do not assume credit risk or use our own capital to invest in loans facilitated through our marketplace.

We have experienced significant growth since we launched our marketplace in March 2012. Our total net revenues increased from US$3.1 million in 2013 to US$31.9 million in 2014, and increased from US$2.1 million for the three months ended March 31, 2014 to US$35.1 million for the three months ended March 31, 2015. We had net losses of US$8.3 million and US$4.5 million in 2013 and 2014, respectively. For the three months ended March 31, 2015, we had net income of US$7.6 million, compared to a net loss of US$3.7 million for the three months ended March 31, 2014.

Our Relationship with CreditEase

We commenced our online consumer finance marketplace business in March 2012 as a business unit under our parent company, CreditEase. CreditEase incorporated Yirendai Ltd. in the Cayman Islands to be our holding company in September 2014. We are currently a wholly owned subsidiary of CreditEase, and will remain a majority-owned subsidiary of CreditEase after this offering. Prior to the establishment of Yirendai Ltd., our business was carried out by various subsidiaries and variable interest entities of CreditEase. We completed our carve-out from CreditEase in the first quarter of 2015, and all of our online consumer finance marketplace business is carried out by our own subsidiaries and consolidated variable interest entity. Our consolidated

 

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financial statements included elsewhere in this prospectus include the assets, liabilities, revenues, expenses and cash flows that were directly attributable to us throughout the periods presented. See “—Critical Accounting Policies, Judgments and Estimates—Basis of Presentation, Combination and Consolidation.”

In the past, CreditEase provided us with origination and servicing, financial, administrative, sales and marketing, risk management, human resources and legal services, as well as the services of a number of its executives and employees. As we were not previously a stand-alone company, CreditEase did not charge us for the provision of these services. The costs of these services have been allocated to us using a proportional cost allocation method and based on headcount or transaction volume for the provision of services attributable to us, and are included in our consolidated financial statements for the periods presented. CreditEase will remain our controlling shareholder upon the completion of this offering, and we plan to enter into a series of agreements with CreditEase with respect to business cooperation and various ongoing relationships between us. Pursuant to these agreements, CreditEase will provide us long-term services such as borrower and investor acquisition, collection and technical support. We also expect to have an arrangement with CreditEase regarding the sharing of data and information and certain mutual intellectual property licenses. In addition, CreditEase will continue to provide us certain supports, such as financial, administrative, human resources and legal services, during a transitional period. For description of the terms of these agreements, see the section with the heading “Our Relationship with CreditEase” included elsewhere in this prospectus.

Key Factors Affecting Our Results of Operations

Major factors affecting our results of operations include the following:

Economic Conditions in China

The demand for online consumer finance marketplace services from borrowers and investors is dependent upon the overall economic conditions in China. General economic factors, including the interest rate environment and unemployment rates, may affect borrowers’ willingness to seek loans and investors’ ability and desire to invest in loans. For example, significant increases in interest rates could cause potential borrowers to defer obtaining loans as they wait for interest rates to become stable or decrease. Additionally, a slowdown in the economy, such as from a rise in the unemployment rate and a decrease in real income, may affect individuals’ level of disposable income. This may negatively affect borrowers’ repayment capability, which in turn may decrease their willingness to seek loans and potentially cause an increase in default rates. If actual or expected default rates increase generally in China or the consumer finance market, investors may delay or reduce their investments in loan products in general, including on our marketplace.

Ability to Acquire Borrowers and Investors Effectively

An increase in loans facilitated on our marketplace largely depends on our ability to attract potential borrowers and investors through sales and marketing efforts. Our sales and marketing efforts include those related to borrower and investor acquisition and retention, and general marketing. We intend to continue to dedicate significant resources to our sales and marketing efforts and constantly seek to improve the effectiveness of these efforts, in particular with regard to borrower and investor acquisition.

We utilize online channels and offline channels, such as CreditEase’s on-the-ground sales network, for borrower acquisition. We attract a fast growing number of our borrowers through various online channels. In addition, CreditEase’s on-the-ground sales network refers borrowers who fall within our target borrower group to our online marketplace. As we continue to convert more prospective borrowers into successful borrower applicants, it would result in an increase in the number of borrowers and, potentially an increase in the volume of loans facilitated over our marketplace.

Similarly, we utilize both online channels and CreditEase’s on-the-ground sales network for investor acquisition. A fast growing majority of our investors are acquired through online channels. Our investor

 

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acquisition efforts are primarily directed towards enhancing our brand name, building investor trust, and word-of-mouth marketing.

Effectiveness of Risk Management

Our ability to effectively segment borrowers into appropriate risk profiles affects our ability to offer attractive pricing to borrowers as well as our ability to offer investors attractive returns, both of which directly relate to users’ confidence in our marketplace. Our proprietary risk management system is built upon data accumulated through our operations, and is further supported by an extensive database accumulated by CreditEase over the past nine years. Our risk management model utilizes big data capabilities to automatically evaluate a borrower’s credit characteristics. At the same time, we use automated verification and fraud detection tools to ensure the quality of the loans facilitated on our marketplace, and supplement these technology driven tools with manual processes when necessary.

Furthermore, our ability to effectively evaluate a borrower’s credit profile and likelihood of default may directly affect our results of operations. For some of the loans facilitated on our marketplace, borrowers pay us a certain portion of the transaction fees upfront upon the completion of our loan facilitation services and the rest on a monthly basis over the term of the applicable loan. If a borrower defaults, we may not be able to collect the outstanding transaction fees from the borrower. Additionally, starting in January 2015, we launched our new credit enhancement service in the form of a risk reserve fund. Under the current arrangement, we collect from borrowers an amount equivalent to a certain percentage, currently 6%, of all loans facilitated through our marketplace, and set aside such amount in an interest-bearing custody account. The current risk reserve fund covers loans originated after January 1, 2015. If a loan originated after January 1, 2015 defaults, we will withdraw funds from the risk reserve fund to repay the principal and accrued interest for the defaulted loan, unless the risk reserve fund is depleted. Our business and financial performance depends on our ability to manage and forecast the default rate. However, given our limited operating history, we have limited information on historical charge-off rates and limited experience in implementing the risk reserve fund, and we may not be able to conduct an accurate charge-off forecast for our target borrower group. See “Business—Risk Management.”

The following chart displays the historical lifetime cumulative M3+ Net Charge Off Rates through March 31, 2015, by booking year or quarter, for all loan products facilitated through our online marketplace for each of the months shown:

 

LOGO

 

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The following chart displays the historical lifetime cumulative M3+ Net Charge Off Rates through March 31, 2015, by booking year or quarter, for certain CreditEase loans to borrowers that meet our definition of prime borrowers, for each of the months shown:

 

LOGO

The data above only include prime borrowers from certain preferred industry categories. Because a majority of our current borrowers are prime borrowers from these industry categories, we believe that such data from CreditEase may provide a reasonable analogy to the expected performance of loans facilitated through our platform. However, the demographics of the borrowers included in the chart above do not entirely reflect our current target prime borrowers. In addition, loans facilitated through our platform are priced differently from loans priced through CreditEase, and there may be other differences between the data above and the loans facilitated through our platform. As such, CreditEase’s historical results are not indicative of our future results.

We define M3+ Net Charge Off Rate, with respect to loans facilitated during a specified time period, which we refer to as a vintage, as the difference between (i) the total outstanding of loans that become over three months delinquent during a specified period and (ii) the total amount of payments collected in the same period with respect to all loans that have ever become over three months delinquent, divided by (iii) the total initial balance of the loans facilitated in such specific vintage.

Ability to Innovate

Our growth to date has depended on, and our future success will depend in part on, successfully meeting borrower and investor demand with new and innovative loan and investment products. We have made and intend to continue to make efforts to develop loan products for borrowers and investors. We constantly evaluate the popularity of our existing product offerings and develop new products and services that cater to the ever evolving needs of our borrowers and investors. Over time we will continue to expand our offerings by introducing new products. From the borrower perspective, we will continue to develop tailored credit products to meet the specific needs of our target borrowers. We plan to expand our ability to implement risk-based pricing by developing more pricing grades to optimize loans based on individual credit criteria, enabling us to facilitate customized loans tailored to individual borrowers’ specific credit profiles. See “Our Business—Product Development.” Failure to continue to successfully develop and offer innovative products could adversely affect our operating results and we may not recoup the costs of launching and marketing new products.

Ability to Compete Effectively

Our business and results of operations depend on our ability to compete effectively in the markets in which we operate. The online consumer finance marketplace industry in China is competitive, and we expect that competition to persist and intensify in the future. In addition to competing with other consumer finance marketplaces like ours, we also compete with other types of financial products and companies that attract

 

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borrowers, investors or both. With respect to borrowers, we primarily compete with traditional financial institutions, such as consumer finance business units in commercial banks, credit card issuers and other consumer finance companies. With respect to investors, we primarily compete with other investment vehicles and asset classes, such as equities, bonds, investment trust products, bank savings accounts, real estate and alternative asset classes. If we are unable to compete effectively, the demand for our marketplace could stagnate or substantially decline, we could experience reduced revenues or our marketplace could fail to achieve or maintain more widespread market acceptance, any of which could harm our business and results of operations.

Regulatory Environment in China

The regulatory environment for the peer-to-peer lending service industry in China is developing and evolving, creating both challenges and opportunities that could affect our financial performance. Due to the relatively short history of the peer-to-peer lending service industry in China, the PRC government has not adopted a clear regulatory framework governing our industry, although PRC governmental officials from a number of agencies and departments have recently voiced support for the development of the peer-to-peer lending service industry in China, and expressed the need for strengthening the regulation and supervision of the industry. We will continue to make efforts to ensure that we are compliant with the existing laws, regulations and governmental policies relating to our industry and to comply with the new laws and regulations or changes under existing laws and regulations that may arise in the future. While new laws and regulations or changes to existing laws and regulations could make loans more difficult to achieve on acceptable terms, or at all, these events could also provide new product and market opportunities.

Key Components of Results of Operations

Net Revenues

We generate revenues by connecting investors with individual borrowers and facilitating loan transactions through our online consumer finance marketplace. Our revenues are presented net of VAT and related surcharges. Our net revenues include transaction fees, service fees and other revenues. The following table sets forth the breakdown of our net revenues, both in absolute amount and as a percentage of our total net revenues, for the periods presented:

 

    For the Year Ended December 31,     For the Three Months Ended
March 31,
 
    2013     2014     2014     2015  
    US$     %     US$     %     US$     %     US$     %  
    (in thousands, except for percentages)  

Net revenues:

               

Transaction fees

    3,045        97.2        31,317        98.2        2,030        97.6        33,808        96.2   

Service fees

    25        0.8        405        1.3        23        1.1        1,215        3.5   

Others

    61        2.0        171        0.5        26        1.3        112        0.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

  3,131      100.0      31,893      100.0      2,079      100.0      35,135      100.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Transaction fees. Transaction fees are charged for the work we perform through our platform in connecting borrowers with investors and for facilitating loan transactions. The amount of the transaction fee charged is based upon the pricing and amount of the underlying loan.

We have developed four segments in our current pricing grid with Grade A, Grade B, Grade C and Grade D loans based on our risk based pricing. See “Business—Risk Management—Proprietary Credit Scoring Model and Loan Qualification System.” We have facilitated loans falling under Grade A since our inception. As part of our efforts to introduce dynamic risk based pricing, we began to facilitate Grade B and Grade D loans in the fourth

 

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quarter of 2014 and Grade C loans in the first quarter of 2015. Despite the introduction of new pricing grades, we continue to focus on prime borrowers and these new price grades enable us to further segment this group of borrowers and price the risks associated with them more effectively.

The transaction fee rate that we charge borrowers varies depending on the pricing grade of the loan facilitated. For loans within the same pricing grade, the transaction fee rate also varies depending on the term of the loan and repayment schedule.

The following table presents the average transaction fee rate for each of the pricing grades:

 

Pricing Grade

   Average
Transaction
Fee Rate
 

A

     6.2

B

     16.7

C

     23.0

D

     28.7

The average transaction fee rate is the average of fee rates for loans falling under the same pricing grade, but with different tenures and repayment schedules.

In terms of cash collection, borrowers pay the transaction fees primarily on a monthly basis over the term of the loan for loans originated in 2013 and up to the nine months ended September 30, 2014. In the fourth quarter of 2014, we adopted a new fee collection schedule whereby we either collect the entire amount of the transaction fee from borrowers upfront upon completion of our loan origination services, or collect a portion of the transaction fee upfront and the rest on a monthly basis over the term of the loan. We typically allow borrowers acquired from online channels to pay only a portion, up to 42%, of the transaction fee upfront.

In 2013 and 2014, we recognized revenue from transaction fees upfront upon completion of the service of facilitating loan origination. A loan was considered originated when the funds provided by the investors were transferred to the borrower’s bank account by the external online payment network providers we used during this time. Due to our switch from the third-party guarantee arrangement to the risk reserve fund model, starting in the first quarter of 2015, we have adopted a new revenue recognition policy—for the fees collected upfront, we recognize revenue upon completion of the loan facilitation services, while for the fees collected on a monthly basis over the term of a loan, we recognize revenue when the fees are collected.

Revenue generated from transaction fees is affected by the total amount of loans facilitated during the period. The following table presents the total amount of loans facilitated and the breakdown of loans facilitated into those generated from online channels and those generated from offline channels, during the periods indicated:

 

    For the Year Ended December 31,     For the Three Months Ended
March 31,
 
    2013     2014     2014     2015  
    RMB     RMB     US$     RMB     RMB     US$  
    (in thousands)  

Amount of loans facilitated:

           

Loans generated from online channels

    98,512        896,003        144,409        44,611        612,839        98,861   

Loans generated from offline channels

    159,810        1,332,559        214,770        125,117        1,007,931        162,596   

Total amount of loans facilitated

    258,322        2,228,562        359,179        169,728        1,620,770        261,457   

 

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We expect our revenue from transaction fees will continue to increase in the foreseeable future, as our business further grows and we develop and introduce new credit products and services on our marketplace.

Service fees. Service fees mainly include the monthly management fee charged to investors for using the automated investing tool, account management fee charged to investors using the self-directed investing tool and other one-time fees, such as those for selling loans over our secondary loan market. We expect that service fees will increase in the foreseeable future, as our business further grows and we develop and introduce new services and investing tools to investors.

Almost all of the service fees in 2013 were the risk reserve management fees we charged to investors for opting into our risk reserve fund. Prior to August 2013, we paid loan principal and accrued interest to investors in the event that their loan defaulted, and we charged investors a risk reserve management fee at a rate of 10% of the loan interest for this service. We ended this practice in August 2013 and switched to a guarantee arrangement. Starting in January 2015, we ceased the guarantee arrangement and launched our new credit enhancement service in the form of a risk reserve fund. At the beginning, we charged investors a risk reserve management fee for providing this credit enhancement service on a trial basis. Currently, we have decided to integrate such fee with other service fees we charge investors and we no longer charge investors a separate fee for providing credit enhancement services. See “—Critical Accounting Policies, Judgments and Estimates—Revenue Recognition—Service fees.”

Other revenue. Other revenue includes penalty fees for prepayment and late payment, and other service fees. Penalty fees are charged to borrowers as a certain percentage of the overdue amount in case of late payment or a certain percentage of interest over the prepaid principal loan amount in case of prepayment.

Operating Costs and Expenses

Our operating costs and expenses consist of sales and marketing expenses, origination and servicing expenses and general and administrative expenses. The following table sets forth our operating costs and expenses, both in absolute amount and as a percentage of our total revenues, for the periods indicated.

 

     For the Year Ended
December 31,
     For the Three Months
Ended March 31,
 
     2013      2014      2014      2015  
     US$      %      US$      %      US$      %      US$      %  
     (in thousands, except for percentages)  

Operating costs and expenses:

                       

Sales and marketing

     5,220         166.7         22,354         70.1         3,358         161.5         17,666         50.3   

Origination and servicing

     1,255         40.1         3,541         11.1         662         31.8         2,044         5.8   

General and administrative

     4,998         159.6         10,490         32.9         1,766         84.9         5,214         14.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating costs and expenses

  11,473      366.4      36,385      114.1      5,786      278.2      24,924      70.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Sales and marketing expenses. Sales and marketing expenses consist primarily of variable marketing expenses, including those related to borrower and investor acquisition and retention and general brand and awareness building. Our user acquisition expenses include charges by third-party online channels for online marketing services such as search engine marketing and search engine optimization, and service expenses charged by CreditEase relating to offline borrower and investor acquisition through CreditEase.

 

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The following table presents the breakdown of sales and marketing expenses into those associated with user acquisition through online and offline channels, both in absolute amount and as a percentage of total sales and marketing expenses, during the periods indicated:

 

     For the Year Ended
December 31,
     For the Three Months Ended
March 31,
 
     2013      2014      2014      2015  
     US$      %      US$      %      US$      %      US$      %  
     (in thousands, except for
percentages)
        

Sales and marketing expenses:

                       

User acquisition through online channels

     3,891         74.5         10,025         44.8         1,192         35.5         5,398         30.5   

User acquisition through offline channels

     1,329         25.5         12,329         55.2         2,166         64.5         12,268         69.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total sales and marketing expenses

  5,220      100.0      22,354      100.0      3,358      100.0      17,666      100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We expect that our overall sales and marketing expenses will continue to increase, and our brand promotion expenses will also increase, in absolute amount in the foreseeable future as our business further grows.

Origination and servicing expenses. Origination and servicing expenses consist primarily of variable expenses and vendor costs, including costs related to credit assessment, collection, customer support and payment processing services associated with facilitating and servicing loans. The origination and servicing expenses in 2013 include a one-time fee of US$0.3 million we paid to Tian Da Xin An, a guarantee company affiliated with CreditEase, for its assumption of the outstanding loan balances under our previous risk reserve fund model, when we switched our credit enhancement service from the previous risk reserve fund model to the guarantee model in August 2013. We expect our origination and servicing expenses to increase in absolute amount in the foreseeable future as our business grows.

General and administrative expenses. General and administrative expenses consist primarily of salaries and benefits related to accounting and finance, business development, legal, human resources and others. We expect our general and administrative expenses to continue to increase in absolute amount in the foreseeable future, as our business further grows and as we become a public company after the completion of this offering.

Taxation

Cayman Islands

We are incorporated in the Cayman Islands. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax. The Cayman Islands does not impose a withholding tax on payments of dividends to shareholders.

Hong Kong

Our subsidiary incorporated in Hong Kong is subject to Hong Kong profit tax at a rate of 16.5%. No Hong Kong profit tax has been levied as we did not have assessable profit that was earned in or derived from the Hong Kong subsidiary during the periods presented. Hong Kong does not impose a withholding tax on dividends.

China

Generally, our subsidiary and consolidated variable interest entity in China are subject to enterprise income tax on their taxable income in China at a rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.

 

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We are subject to VAT at a rate of 6% on the services we provide to borrowers and investors, less any deductible VAT we have already paid or borne. We are also subject to surcharges on VAT payments in accordance with PRC law. During the periods presented, we were not subject to business tax on the services we provide.

Dividends paid by our wholly foreign-owned subsidiary in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and receives approval from the relevant tax authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. See “Risk Factors—Risks Related to Doing Business in China—We rely on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiary to make payments to us could have a material adverse effect on our ability to conduct our business.”

If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”

Critical Accounting Policies, Judgments and Estimates

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.

The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this prospectus. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.

Basis of Presentation, Combination and Consolidation

Yirendai Ltd. was founded by our parent company, CreditEase, in September 2014. Prior to the establishment of Yirendai Ltd., our online consumer finance marketplace business was carried out by various subsidiaries and variable interest entities of CreditEase as a business unit under CreditEase. We completed our carve-out from CreditEase in the first quarter of 2015, and all of our online consumer finance marketplace business is carried out by our own subsidiaries and consolidated variable interest entity.

 

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Since we and CreditEase are under common control, our consolidated financial statements include the assets, liabilities, revenues, expenses and cash flows that were directly attributable to our business for all periods presented. The assets and liabilities have been stated at historical carrying amounts. In addition, our consolidated financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented.

Only those assets and liabilities that were specifically identifiable to our business were included in our consolidated balance sheets. For liabilities related to us for which CreditEase advanced the funding, such amount was recorded as amounts due to CreditEase. Our consolidated statements of operations consist of all costs and expenses related to us, including costs and expenses related to us that were allocated from CreditEase. Allocations from CreditEase, including amounts allocated to sales and marketing expenses, origination and servicing expenses, and general and administrative expenses, were made using a proportional cost allocation method and based on headcount or transaction volume for the provision of services attributable to us. Income tax liability was calculated as if we had filed separate tax returns for all the periods presented.

We conduct our online consumer finance marketplace business in China through our PRC subsidiary, Heng Ye, and our consolidated variable interest entity, Heng Cheng. Due to PRC legal restrictions on foreign ownership and investment in value-added telecommunications services, or internet content provision services in particular, we conduct our online operations in China through a series of contractual arrangements entered into between Heng Ye and Heng Cheng and its shareholders. Heng Cheng operates our website www.yirendai.com and has an ICP license as an internet information provider. Most of our revenues, costs and expenses directly related to loan facilitating and servicing in China are generated through Heng Cheng. As a result of the contractual arrangements, we have the ability to direct the activities of Heng Cheng that most significantly impact its economic performance, and to obtain a majority of the residual returns of Heng Cheng. We are considered the primary beneficiary of Heng Cheng, and accordingly the entity is our variable interest entity under U.S. GAAP and we consolidate its results in our consolidated financial statements. Any changes in PRC laws and regulations that affect our ability to control Heng Cheng might preclude us from consolidating the entity in the future.

Our consolidated financial statements may not be reflective of our results of operations, financial position and cash flows had we been operating as a stand-alone company during those periods. Our historical results for any period presented are not necessarily indicative of the results to be expected for any future period. Although we believe that the assumptions underlying our consolidated financial statements and the allocations made to us are reasonable, our basis of presentation and allocation methodologies required significant assumptions, estimates and judgments. Using a different set of assumptions, estimates and judgments would have materially impacted our financial position and results of operations.

Revenue Recognition

We provide services by connecting investors with individual borrowers and facilitating loan transactions through our online consumer finance marketplace. Revenue is recognized when the service is performed and it results from fees earned. Fees include transaction fees, service fees and other revenue. Our revenues are presented net of VAT and related surcharges.

We recognize revenues when the following four revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the selling price is fixed or determinable, and (iv) collectability is reasonably assured.

Transaction fees

Transaction fees are charged for the services we perform through our platform in connecting borrowers with investors and facilitating loan transactions. The transaction fee rate varies depending on the pricing grade of the loan facilitation.

 

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Historically, we collected the transaction fee primarily on a monthly basis over the term of the loan. Since the fourth quarter of 2014, we have adopted a new fee collection schedule whereby we either collect the entire amount upfront, or collect a portion of the transaction fee upfront and the rest on a monthly basis over the term of the loan.

Historically, the four revenue recognition criteria mentioned above were met upon completion of the service of loan origination. We recognized 100% revenue upfront upon completion of the service of facilitating loan origination and recorded no allowance for the uncollectible accounts, as all the transaction fees were guaranteed by Tian Da Xin An, a guarantee company. A loan was considered originated when the funds provided by the investors were transferred to the borrower’s bank account by the external online payment network providers we used at the time.

Starting from January 2015, the collection of transaction fees is no longer guaranteed by Tian Da Xin An. We evaluated the factors that are relevant to the uncertainty of collectability, including (i) credit risk of the portfolio, (ii) prepayment risk, (iii) the change in risk profile resulting from launching new products, and (iv) macroeconomic cycle, and concluded that the collectability could not be reasonably assured. Thus, from the first quarter of 2015, for the fees collected upfront, we recognize revenue upon completion of the service of facilitating loan origination to the extent they exceed the stand-ready liabilities related to the risk reserve fund as discussed under “—Liabilities from risk reserve fund servicing”, while for the fees collected on a monthly basis over the term of a loan, we recognize revenue when the fees are actually collected.

Service fees

Service fees. Service fees mainly include the monthly management fee charged to investors using the automated investing tool, account management fee charged to investors using the self-directed investing tool, and other one-time fees received, such as for selling loans over our secondary loan market.

We charge the investors who choose to use the automated investing tool a management fee that is equal to the interest return of the loans to the investor in excess of the targeted return. Such fee is recognized as revenue on a monthly basis upon collection.

Risk reserve management fee. In order to be more competitive we offer investors credit enhancement services to provide certain level of assurance to investors.

Prior to August 2013, we provided credit enhancement service in the form of a risk reserve fund, under which we paid loan principal and accrued interest to investors in the event that their loans defaulted. We reimbursed the loan principal and accrued interest to the investor in the case of default and then sought to collect the outstanding amounts from the borrower through a collection team. For this service, we charged investors a monthly service fee at a rate of 10% of the monthly interest on loans and recognized such service fee as revenue.

From August 2013 to December 2014, we replaced the service discussed above with a guarantee arrangement. We had a guarantee arrangement with Tian Da Xin An, a guarantee company, to provide investors with the option of purchasing the assurance that their principal and interest would be repaid in the event that the loans in which they invested defaulted. The guarantee company was responsible for repaying the principal and accrued interest of the defaulted loan and the guarantee company charged the investors at a rate of 10% of the monthly interest on loans as service fee. In practice, we reimbursed the loan principal and accrued interest to the investor in the event of default, and then collected that amount from the guarantee company. We collected the guarantee service fee charged to investors by the guarantee company on its behalf, and then remitted this amount to the guarantee company. We did not recognize the guarantee service fee as revenue. We ceased this guarantee arrangement in December 2014. The outstanding loan balance guaranteed under the previous guarantee arrangement will continue to be covered under the guarantee arrangement until such loans reach maturity.

 

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Starting in January 2015, we ceased the guarantee arrangement and launched our new credit enhancement services in the form of a risk reserve fund. At the beginning, we charged investors a risk reserve management fee at a rate of 10% of the monthly interest rate paid by borrowers for providing this credit enhancement service on a trial basis, and recognized the fee as revenue. Currently, we have decided to integrate such fee with other service fees we charge investors and we no longer charge investors a separate fee for providing credit enhancement services. While transaction fees for upfront services are recorded only to the extent they exceed our stand-ready liabilities related to the risk reserve fund, the fees from investors are recognized as revenue as collection occurs.

Other revenue

Other revenue includes penalty fees for prepayment and late payment, and other service fees. Penalty fees are charged to borrowers as a certain percentage of the overdue amount in case of late payment or a certain percentage of interest over the prepaid principal loan amount in case of prepayment.

Liabilities from risk reserve fund servicing

Starting in January 2015, we terminated our relationship with the guarantee company and launched our new credit enhancement service in the form of a risk reserve fund. If a loan originated after January 1, 2015 defaults, we guarantee the principal and accrued interest repayment of the defaulted loan up to a maximum cap. We recognize a stand-ready liability related to the risk reserve fund as the higher of the fair value of the future repayments and the probable contingent liability amount required to be recognized at the inception of the guarantee.

Based on past experience, we have an average historical loan default rate of 7-8% of the loan facilitation amount. Therefore, our management estimates that the future payout ratio will be approximately the same percentage, which is the fair value of future payment assuming no significant change in macroeconomic factors. Taking this into account, we cap our payout under the risk reserve fund at 6% of the total loan facilitation amount, and we consider that the fair value of the stand-ready liability of the risk reserve fund service is limited to the risk reserve fund balance.

Income Taxes

In preparing our consolidated financial statements, we must estimate our income taxes in each of the jurisdictions in which we operate. We estimate our actual tax exposure and assess temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which we include in our consolidated balance sheet. We must then assess the likelihood that we will recover our deferred tax assets from future taxable income. If we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance, we must include an expense within the tax provision in our consolidated statement of operations.

Management must exercise significant judgment to determine our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We base the valuation allowance on our estimates of taxable income in each jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. If actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could materially impact our financial position and results of operations.

U.S. GAAP requires that an entity recognize the impact of an uncertain income tax position on the income tax return at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. If we ultimately determine that payment of these liabilities will be unnecessary, we will reverse the liability and recognize a tax benefit during that period. Conversely, we record additional tax charges in a period

 

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in which we determine that a recorded tax liability is less than the expected ultimate assessment. We did not recognize any significant unrecognized tax benefits during the periods presented in this prospectus.

Uncertainties exist with respect to the application of the New EIT Law to our operations, specifically with respect to our tax residency status. The New EIT Law specifies that legal entities organized outside of the PRC will be considered residents for PRC income tax purposes if their “de facto management bodies” are located within the PRC. The New EIT Law’s implementation rules define the term “de facto management bodies” as “establishments that carry out substantial and overall management and control over the manufacturing and business operations, personnel, accounting, properties, etc. of an enterprise.”

Because of the uncertainties resulted from limited PRC tax guidance on the issue, it is uncertain whether our legal entities organized outside of the PRC constitute residents under the New EIT Law. If one or more of our legal entities organized outside of the PRC were characterized as PRC tax residents, the impact would adversely affect our results of operations. See “Risk Factors—Risks Related to Doing Business in China.”

Internal Control Over Financial Reporting

In connection with the audit of our consolidated financial statements as of and for the two years ended December 31, 2014, we and our independent registered public accounting firm identified two material weaknesses, and other control deficiencies including significant deficiencies as of December 31, 2014. As defined in standards established by the PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

One material weakness that has been identified related to our lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements to properly address complex U.S. GAAP accounting issues and to prepare and review our consolidated financial statements and related disclosures to fulfill U.S. GAAP and SEC financial reporting requirements. The other material weakness that has been identified related to our lack of comprehensive accounting policies and procedures manual in accordance with U.S. GAAP. Either of these material weaknesses, if not timely remedied, may lead to significant misstatements in our consolidated financial statements in the future.

We have implemented and plan to implement a number of measures to address the material weaknesses that have been identified. We have hired additional qualified financial and accounting staff with extensive U.S. GAAP and SEC reporting experience, including our chief financial officer and financial controller. We have allocated additional resources to improve financial oversight function, and to prepare and review the consolidated financial statements and related disclosures in accordance with U.S. GAAP and SEC reporting requirements. Furthermore, we will continue to hire additional competent accounting staff with appropriate knowledge and experience of U.S. GAAP and SEC reporting requirements, and will provide sufficient and additional appropriate training to our accounting and financial reporting personnel, especially training related to U.S. GAAP and SEC reporting requirements. We will also develop and implement a full set of U.S. GAAP accounting policies and financial reporting procedures as well as related internal control policies, including implementing a comprehensive accounting manual to guide the day-to-day accounting operation and reporting work. We expect to complete the measures discussed above as soon as practicable and will continue to implement measures to remediate our internal control deficiencies in order to meet the deadline imposed by Section 404 of the Sarbanes Oxley Act. We expect that we will incur significant costs in the implementation of such measures. However, we cannot assure you that all these measures will be sufficient to remediate our material weaknesses in time, or at all. See “Risk factors—Risks Related to Our Business—In connection with the audits of our consolidated financial statements as of and for the years ended December 31, 2014, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. If we fail to develop and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.”

 

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As a company with less than US$1.0 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. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Results of Operations

The following table sets forth a summary of our consolidated results of operations for the periods indicated, both in absolute amount and as a percentage of our total revenues. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. We only began our business operations in March 2012, and 2013 was the first year in which we generated revenues for the entire fiscal year. Due to our limited operating history, period-to-period comparisons discussed below may not be meaningful and are not indicative of our future trends. See “Risk Factors—Risks Related to Our Business—We have a limited operating history in a new and evolving market, which makes it difficult to evaluate our future prospects.”

 

     For the Year Ended December 31,     For the Three Months Ended March 31,  
     2013     2014     2014     2015  
     US$     %     US$     %     US$     %     US$     %  
     (in thousands, except for percentages)  

Net revenue:

                

Transaction fees

     3,045        97.2        31,317        98.2        2,030        97.6        33,808        96.2   

Service fees

     25        0.8        405        1.3        23        1.1        1,215        3.5   

Others

     61        2.0        171        0.5        26        1.3        112        0.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

  3,131      100.0      31,893      100.0      2,079      100.0      35,135      100.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

Sales and marketing

  5,220      166.7      22,354      70.1      3,358      161.5      17,666      50.3   

Origination and servicing

  1,255      40.1      3,541      11.1      662      31.8      2,044      5.8   

General and administrative

  4,998      159.6      10,490      32.9      1,766      84.9      5,214      14.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

  (11,473   (366.4   (36,385   (114.1   (5,786   (278.2   (24,924   (70.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

  —        —        —        —        —        —        11      0.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before provision for income taxes

  (8,342   (266.4   (4,492   (14.1   (3,707   (178.3   10,222      29.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

  —        —        5      0.0      —        —        2,580      7.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  (8,342   (266.4   (4,497   (14.1   (3,707   (178.3   7,642      21.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

Net revenues. Our net revenues increased from US$2.1 million in the three months ended March 31, 2014 to US$35.1 million in the three months ended March 31, 2015, primarily attributable to the increase in our transaction fees.

 

   

Transaction fees. Transaction fees increased from US$2.0 million in the three months ended March 31, 2014 to US$33.8 million in the three months ended March 31, 2015, primarily due to the substantial increase in the volume of loans facilitated through our marketplace, which increased from

 

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approximately RMB169.7 million in the three months ended March 31, 2014 to RMB1,620.8 million (US$261.5 million) in the three months ended March 31, 2015. The increase in the volume of loans facilitated through our marketplace was due to a substantial increase in the number of borrowers from 2,487 in the three months ended March 31, 2014 to 27,581 in the three months ended March 31, 2015. To a lesser extent, the increase in transaction fees is also due to the launch of new loan products with higher transaction fee rates in the fourth quarter of 2014 and first quarter of 2015.

 

    Service fees. Service fees increased from US$23,000 in the three months ended March 31, 2014 to US$1.2 million in the three months ended March 31, 2015, primarily attributable to the monthly management fee that we started charging investors using our automated investing tool in the second quarter of 2014 and the substantial increase in the volume of loans facilitated through our marketplace.

 

    Others. Our other revenue increased from US$26,000 in the three months ended March 31, 2014 to US$0.1 million in the three months ended March 31, 2015.

Operating costs and expenses. Our total operating costs and expenses increased from US$5.8 million in the three months ended March 31, 2014 to US$24.9 million in the three months ended March 31, 2015, primarily attributable to the increase in sales and marketing expenses, and to a lesser extent, to the increase in general and administrative expenses.

 

    Sales and marketing expenses. Our sales and marketing expenses increased from US$3.4 million in the three months ended March 31, 2014 to US$17.7 million in the three months ended March 31, 2015. The increase was primarily due to the increase in expenses associated with our continued user acquisition efforts. Our sales and marketing expenses as a percentage of our total revenues decreased from 161.5% to 50.3% during the same period, primarily due to the improved effectiveness of our user acquisition efforts and in particular, user acquisition through online channels.

 

    Origination and servicing expenses. Our origination and servicing expenses increased from US$0.7 million in the three months ended March 31, 2014 to US$2.0 million in the three months ended March 31, 2015, in line with the substantial increase in the volume of loans facilitated through our marketplace. Our origination and servicing expenses as a percentage of our total revenues decreased from 31.8% to 5.8% during the same period, primarily attributable to our improved operational efficiency.

 

    General and administrative expenses. Our general and administrative expenses increased by 195.2% from US$1.8 million in the three months ended March 31, 2014 to US$5.2 million in the three months ended March 31, 2015, primarily due to the increase in salaries and benefits paid to our general and administrative personnel as well as the increase in professional service fees we paid to third-party service providers in preparation for this offering. Our general and administrative expenses as a percentage of our total revenues decreased from 84.9% to 14.8% during the same period, primarily because our greater operational efficiency enabled us to achieve rapid revenue growth with relatively slower growth in general and administrative expenses.

Income tax expense. Our income tax expense was US$2.6 million in the three months ended March 31, 2015, as compared to nil in the three months ended March 31, 2014, which mainly results from the net income before provision for income taxes we generated in the first quarter of 2015, as compared to a loss before provision for income taxes in the first quarter of 2014.

Net income/(loss). As a result of the foregoing, we recorded net income of US$7.6 million in the three months ended March 31, 2015, as compared to a net loss of US$3.7 million in the three months ended March 31, 2014.

 

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Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Net revenues. Our net revenues increased from US$3.1 million in 2013 to US$31.9 million in 2014, primarily attributable to the increase in our transaction fees.

 

    Transaction fees. Transaction fees increased from US$3.0 million in 2013 to US$31.3 million in 2014, primarily due to the substantial increase in the volume of loans facilitated through our marketplace, which increased from approximately RMB258.3 million in 2013 to RMB2,228.6 million (US$359.2 million) in 2014. The increase in the volume of loans facilitated through our marketplace was due to a substantial increase in the number of borrowers from 3,549 in 2013 to 39,344 in 2014. To a lesser extent, the increase in transaction fees is also due to (i) our facilitation of more long-term loans in 2014 compared to 2013, with the rate of transaction fee charged typically being higher for long-term loans, and (ii) our launch of new loan products with higher transaction fee rates in the fourth quarter of 2014.

 

    Service fees. Service fees increased from US$25,000 in 2013 to US$0.4 million in 2014, primarily attributable to the monthly management fee that we started charging investors using our automated investing tool in the second quarter of 2014, and to a lesser extent, to an increase in fees we charged investors for selling loans on our secondary loan market.

 

    Others. Our other revenue increased from US$61,000 in 2013 to US$0.2 million in 2014.

Operating costs and expenses. Our total operating costs and expenses increased from US$11.5 million in 2013 to US$36.4 million in 2014, primarily attributable to the increase in sales and marketing expenses, and to a lesser extent, to the increase in general and administrative expenses.

 

    Sales and marketing expenses. Our sales and marketing expenses increased from US$5.2 million in 2013 to US$22.4 million in 2014. The increase was primarily due to the increase in expenses associated with our continued user acquisition efforts. Our sales and marketing expenses as a percentage of our total revenues decreased from 166.7% to 70.1% during the same period, primarily due to the improved effectiveness of our user acquisition efforts and in particular, user acquisition through online channels.

 

    Origination and servicing expenses. Our origination and servicing expenses increased from US$1.3 million in 2013 to US$3.5 million in 2014, in line with the substantial increase in the volume of loans facilitated through our marketplace. Our origination and servicing expenses as a percentage of our total revenues decreased from 40.1% to 11.1% during the same period, primarily attributable to our improved operational efficiency.

 

    General and administrative expenses. Our general and administrative expenses increased by 109.9% from US$5.0 million in 2013 to US$10.5 million in 2014, primarily due to the increase in salaries and benefits paid to our general and administrative personnel. Our general and administrative expenses as a percentage of our total revenues decreased from 159.6% to 32.9% during the same period, primarily because our greater operational efficiency enabled us to achieve rapid revenue growth with relatively slower growth in general and administrative expenses.

Net loss. As a result of the foregoing, we recorded a net loss of US$4.5 million in 2014, a decrease of 46.1% from the net loss of US$8.3 million in 2013.

 

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Selected Quarterly Results of Operations

The following table sets forth our historical unaudited consolidated selected quarterly results of operations for the periods indicated.

 

  For the Three Months Ended  
  March 31,
2013
  June 30,
2013
  September 30,
2013
  December 31,
2013
  March 31,
2014
  June 30,
2014
  September 30,
2014
  December 31,
2014
  March 31,
2015
 
  (in thousands of US$)  

Net revenues:

                 

Transaction fees

    15        170        967        1,893        2,030        2,911        7,965        18,411        33,808   

Service fees

    2        2        6        15        23        24        70        288        1,215   

Others

    13        8        29        11        26        30        43        72        112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    30        180        1,002        1,919        2,079        2,965        8,078        18,771        35,135   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

                 

Sales and marketing

    334        671        1,720        2,495        3,358        5,737        6,640        6,619        17,666   

Origination and servicing

    200        209        527        319        662        688        877        1,314        2,044   

General and administrative

    1,236        982        1,297        1,483        1,766        1,860        2,448        4,416        5,214   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    (1,770     (1,862     (3,544     (4,297     (5,786     (8,285     (9,965     (12,349     (24,924
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

    —          —          —          —          —          —          —          —          11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before provision for income taxes

    (1,740     (1,682     (2,542     (2,378     (3,707     (5,320     (1,887     6,422        10,222   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes expenses

    —          —          —          —          —          —          —          (5     (2,580
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income

    (1,740     (1,682     (2,542     (2,378     (3,707     (5,320     (1,887     6,417        7,642   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table sets forth our historical unaudited consolidated selected quarterly results of operations for the periods indicated, as a percentage of total net revenues.

 

  For the Three Months Ended  
  March 31,
2013
  June 30,
2013
  September 30,
2013
  December 31,
2013
  March 31,
2014
  June 30,
2014
  September 30,
2014
  December 31,
2014
  March 31,
2015
 
  (as percentage of total net revenues)  

Net revenues:

                 

Transaction fees

    50.0        94.5        96.5       
98.6
  
    97.6        98.2        98.6        98.1        96.2   

Service fees

    6.7        1.1        0.6        0.8        1.1        0.8        0.9        1.5        3.5   

Others

    43.3        4.4        2.9        0.6        1.3        1.0        0.5        0.4        0.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenues

    100.0        100.0        100.0        100.0        100.0        100.0        100.0        100.0        100.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses:

                 

Sales and marketing

    1,113.3        372.8        171.7        130.0        161.5        193.5        82.2        35.3        50.3   

Origination and servicing

    666.7        116.1        52.6        16.6        31.8        23.2        10.9        7.0        5.8   

General and administrative

    4,120.0        545.5        129.4        77.3        84.9        62.7        30.3        23.5        14.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    5,900.0        1,034.4        353.7        223.9        278.2        279.4        123.4        65.8        70.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income

    —          —          —          —          —          —          —          —          0.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/income before provision for income taxes

    (5,800.0     (934.4     (253.7     (123.9     (178.3     (179.4     (23.4     34.2        29.1   

Income taxes expenses

    —          —          —          —          —          —          —          0.0        7.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income

    (5,800.0     (934.4     (253.7     (123.9     (178.3     (179.4     (23.4     34.2        21.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth the amount of loans facilitated by us for each of the quarters between January 1, 2013 and March 31, 2015.

 

    For the Three Months Ended  
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
    September 30,
2014
    December 31,
2014
    March 31,
2015
 
    (in thousands of RMB)  

Amount of loans facilitated

    2,635        15,210        82,419        158,058        169,728        251,802        685,761        1,121,271        1,620,770   

Loans generated from online channels

    2,635        11,360        29,089        55,428        44,611        77,152        271,693        502,547        612,839   

Loans generated from offline channels

    —          3,850        53,330        102,630        125,117        174,650        414,068        618,724        1,007,931   

We experience seasonality in our business, reflecting seasonal fluctuations in internet usage and traditional personal consumption patterns, as our individual borrowers typically use their borrowing proceeds to finance their personal consumption needs. For example, we generally experience lower transaction value on our online consumer finance marketplace during national holidays in China, particularly during the Chinese New Year holiday season in the first quarter of each year. Overall, the historical seasonality of our business has been mild due to our rapid growth but may increase further in the future. Due to our limited operating history, the seasonal trends that we have experienced in the past may not apply to, or be indicative of, our future operating results.

Liquidity and Capital Resources

Cash Flows and Working Capital

In 2013 and 2014, we generated negative cash flows from operating activities of US$11.3 million and US$36.8 million, respectively, in the three months ended March 31, 2015, we had positive cash flow from operating activities of US$1.8 million. Prior to the establishment of Yirendai Ltd., our online consumer finance marketplace business was carried out by various subsidiaries and variable interest entities of CreditEase as a business unit under CreditEase. We completed our carve-out from CreditEase in the first quarter of 2015. In 2013 and 2014, our principal sources of liquidity have been advances from our parent company, CreditEase, representing operating costs and expenses paid or borne by the various entities affiliated with CreditEase on our behalf. We will not have such advances from CreditEase going forward.

As of March 31, 2015, we had cash and cash equivalents of approximately US$1.8 million, as compared to cash and cash equivalents of approximately US$0.2 million as of December 31, 2014. We have received capital contributions from CreditEase in the past and expect to receive additional capital contributions of approximately RMB60 million (US$9.7 million) from CreditEase in the near future. We believe that our anticipated cash flows from operating activities, together with the capital contributions we expect to receive from CreditEase, will be sufficient to meet our anticipated working capital requirements and capital expenditures in the ordinary course of business for the next 12 months. We may, however, need additional cash resources in the future. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. We may, however, need additional cash resources in the future if we experience changes in business conditions or other developments, or if we find and wish to pursue opportunities for investment, acquisition, capital expenditure or similar actions. 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 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 would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all. See “Risk Factors—We may need additional capital, and financing may not be available on terms acceptable to us, or at all.”

Our ability to manage our working capital, including accounts receivable, prepaid expenses and other assets and accrued expenses and other liabilities, may materially affect our financial position and results of operations.

 

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See “Risk Factors—Failure to manage our liquidity and cash flows may materially and adversely affect our financial position and results of operations.”

Our accounts receivable primarily include the transaction fees receivable from borrowers. As of December 31, 2013, December 31, 2014 and March 31, 2015, we had accounts receivable of US$3.1 million, US$26.0 million and US$22.7 million, respectively. The increase from December 31, 2013 to December 31, 2014 was in line with the substantial increase in our revenues from 2013 to 2014. In 2013 and 2014, we recognize revenue from transaction fees upfront upon completion of the services of facilitating loan origination, and no allowances for uncollectable accounts receivable were recorded as of December 31, 2013 and December 31, 2014 as all accounts receivable were guaranteed by Tian Da Xin An. In 2013 and up to the nine months ended September 30, 2014, borrowers paid the transaction fees primarily on a monthly basis over the term of the loan. In the fourth quarter of 2014, we adopted a new fee collection schedule whereby we either collect the entire amount of the transaction fee upfront upon completion of our loan facilitation services, or collect a portion of the transaction fee upfront and the rest on a monthly basis over the term of the loan. Due to our switch from the third-party guarantee arrangement to the risk reserve fund model, starting in the first quarter of 2015, we have adopted a new revenue recognition policy—for the fees collected upfront, we recognize revenue upon completion of the loan facilitation services, while for the fees collected on a monthly basis over the term of a loan, we recognize revenue when the fees are collected. As a result, we did not record additional accounts receivable during the three months period ended March 31, 2015 and no allowance for uncollectable accounts receivable was recorded as of March 31, 2015. As a result, our accounts receivable as of March 31, 2015 decreased from that as of December 31, 2014, and we expect that our accounts receivable will continue to decrease going forward.

Our prepaid expenses and other assets include primarily funds receivable from external payment networks, and our accrued expenses and other liabilities include primarily funds payable to investors or borrowers. The funds receivable from external payment networks and funds payable were a result of our use of master custody accounts with various external payment networks. Borrower and investor funds were deposited into master custody accounts managed by any one of the external payment networks we utilized. We used these accounts to collect and transfer loan funds to borrowers and to collect and repay loan principal and interest to investors. We also used such accounts to collect the transaction fees and service fees we charge, and to repay and collect default loan principal and interest. Funds receivable from such external payment networks include funds received from investors but not yet transferred to borrowers, repayment of loan and interest received from borrowers but not yet transferred to investors, and transaction fees and service fees received but not yet transferred to us, by the external payment networks due to a settlement time lag. Similarly, we also have funds payable to investors or borrowers due to a settlement time lag with such external payment networks. In June 2015 we migrated to a new system whereby China Guangfa Bank not only maintains an account for us but also maintains separate in trust for, or ITF, accounts for borrowers and investors. With this arrangement, we may have less funds receivable from external payment networks and funds payable on our balance sheet.

Although we consolidate the results of operations of our variable interest entity, we only have access to the cash balances and the future earnings of our consolidated variable interest entity through our contractual arrangements with it. 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.”

In utilizing the proceeds we expect to receive from this offering and the other cash that we hold offshore, we may (i) make additional capital contributions to our PRC subsidiary, (ii) establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, (iii) make loans to our PRC subsidiaries, or (iv) acquire offshore entities with business operations in China in offshore transactions. However, most of these uses are subject to PRC regulations and approvals. For example:

 

    capital contributions to our PRC subsidiaries, whether existing or newly established ones, must be approved by the MOC or its local counterparts; and

 

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    loans by us to our PRC subsidiaries, which are foreign-invested enterprises, to finance their activities cannot exceed statutory limits and must be registered with SAFE or its local branches.

See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiary, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

Substantially all of our future revenues are likely to continue to be in the form of RMB. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiary is allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, current PRC regulations permit our PRC subsidiary to pay dividends to us only out of its accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Our PRC subsidiary is required to set aside at least 10% of its after-tax profits after making up previous years’ accumulated losses each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, capital account transactions, which include foreign direct investment and loans, must be approved by and/or registered with SAFE and its local branches. See “Risk Factors—Risks Relating to Doing Business in China—Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.”

The following table sets forth a summary of our cash flows for the periods indicated:

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2013      2014      2014      2015  
     (in US$ thousands)                

Summary Consolidated Cash Flow Data:

           

Net cash (used in)/provided by operating activities

     (11,274      (36,846      (8,136      1,828   

Net cash used in investing activities

     (123      (580      (196      (302

Net cash provided by financing activities

     11,397         37,650         8,332         —     

Net increase/(decrease) in cash and cash equivalents

     —           222         —           1,535   

Cash and cash equivalents at beginning of period

     —           —           —           222   

Cash and cash equivalents at end of period

     —           222         —           1,757   

Operating Activities

Net cash generated from operating activities was US$1.8 million in the three months ended March 31, 2015. In 2014, the principal items accounting for the difference between our net cash generated from operating activities and our net income of US$7.6 million were changes in certain working capital accounts, principally a decrease in accounts receivable of US$3.2 million, offset by an increase of US$9.1 million in the amounts due from related parties net of amounts due to related parties. The decrease in accounts receivable was due to our change of revenue recognition policy in the first quarter of 2015. The increase in amounts due from related parties represents the increase in transaction fees and service fees received by an affiliate of CreditEase on behalf of us through the external payment networks we used at the time.

Net cash used in operating activities was US$36.8 million in 2014. In 2014, the principal items accounting for the difference between our net cash used in operating activities and our net loss of US$4.5 million were

 

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changes in certain working capital accounts, principally an increase in prepaid expenses and other assets of US$31.1 million, partially offset by an increase in accrued expenses and other liabilities of US$27.5 million, and an increase in accounts receivable of US$23.1 million. The increase in prepaid expenses and other assets was (i) primarily due to the increase in funds receivable from the external payment networks, which include funds received from investors but not yet transferred to borrowers, repayment of loan and interest received from borrowers but not yet transferred to investors, and transaction fees and service fees received but not yet transferred to us, by the external payment networks we used at the time due to a settlement time lag, and (ii) to a lesser extent, due to the increase in the deposits we paid to third parties for online marketing and user acquisition services. The increase in accrued expenses and other liabilities was primarily attributable to the increase in funds payable to investors or borrowers due to a settlement time lag with the external payment networks that we used at the time to collect and transfer loan funds to borrowers and collect and repay loan principal and interest to investors. The increase in our accounts receivable was due to the significant growth of loan volume on our marketplace in 2014.

Net cash used in operating activities was US$11.3 million in 2013. In 2013, the principal items accounting for the difference between our net cash used in operating activities and our net loss of US$8.3 million were changes in certain working capital accounts, principally an increase in accounts receivable of US$3.0 million, and an increase in prepaid expenses and other assets of US$1.3 million partially offset by an increase in accrued expenses and other liabilities of US$1.1 million. The increase in our accounts receivable was due to the growth of loan volume on our marketplace in 2013. The increase in prepaid expenses and other assets was primarily due to the increase in funds receivable from the external payment networks we used at the time, namely the funds received by the external payment networks but not yet transferred to borrowers, investors or us due to a settlement time lag. The increase in accrued expenses and other liabilities was primarily attributable to the increase in funds payable to investors or borrowers due to the settlement time lag with the external payment networks we used at the time, which we used to handle the transfer of funds to and from borrowers and investors.

Investing Activities

Net cash used in investing activities was US$0.3 million in the three months ended March 31, 2015, which was primarily attributable to our purchases of property and equipment.

Net cash used in investing activities was US$0.6 million in 2014, which was attributable to our purchases of property and equipment.

Net cash used in investing activities was US$0.1 million in 2013, which was attributable to our purchases of property and equipment.

Financing Activities

Net cash provided by financing activities was nil in the three months ended March 31, 2015.

Net cash provided by financing activities was US$37.7 million in 2014, which was primarily attributable to cash contribution from our parent company, CreditEase.

Net cash provided by financing activities was US$11.4 million in 2013, which was primarily attributable to cash contribution from CreditEase.

Capital Expenditures

We made capital expenditures of US$0.1 million, US$0.6 million and US$0.3 million in 2013, 2014 and the first quarter of 2015, respectively. In these periods, our capital expenditures were mainly used for purchases of

 

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property and equipment. Our capital expenditures for 2015 are expected to be approximately RMB10.0 million (US$1.6 million), consisting primarily of expenditures related to the expansion and enhancement of our IT infrastructure. We will continue to make capital expenditures to meet the expected growth of our business.

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2014:

 

     Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 
     (in US$ thousands)  

Operating Lease Obligations

     1,836         1,299         537         —           —     

Our operating lease obligations relate to our leases of office premises. We lease our office premises under a non-cancelable operating lease with an expiration date in May 2016. Rental expenses under operating leases for 2013, 2014 and the three months ended March 31, 2015 were US$0.6 million, US$1.1 million and US$0.3 million, respectively.

Other than those shown above, we did not have any significant capital and other commitments, long-term obligations, or guarantees as of December 31, 2014.

Off-Balance Sheet Commitments and Arrangements

In January 2015, we launched our new credit enhancement service in the form of a risk reserve fund to provide a certain level of assurance to investors who invest in loans through our marketplace. See “—Critical Accounting Policies, Judgments and Estimates—Risk Reserve Fund” and “Business—Risk Management—Credit Enhancement.” Other than this risk reserve fund arrangement, we have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

Holding Company Structure

Yirendai Ltd. is a holding company with no material operations of its own. We conduct our operations primarily through our subsidiary and consolidated variable interest entity in China. As a result, Yirendai Ltd.’s ability to pay dividends depends upon dividends paid by our PRC subsidiary. If our existing PRC subsidiary or any newly formed ones 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 foreign-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 subsidiary and our consolidated variable interest entity in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds 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 consolidated variable interest entity may allocate a portion of its after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is

 

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subject to examination by the banks designated by SAFE. Our PRC subsidiary has not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds.

Inflation

Since our inception, inflation in China has not materially affected 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 2013, December 2014 and March 2015 were increases of 2.5%, 1.5% and 1.4%, 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.

Quantitative and Qualitative Disclosures about Market Risk

Foreign Exchange Risk

All of our revenues and substantially all of our expenses are denominated in RMB, whereas our reporting currency is the U.S. dollar. In our consolidated financial statements, our financial information that uses RMB as the functional currency has been translated into U.S. dollars. Due to foreign currency translation adjustments, we had a foreign exchange gain of US$49,000 in 2013, a foreign exchange loss of US$0.3 million in 2014, and a foreign exchange gain of US$68,000 in the first quarter of 2015. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations.

We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk. Although in general our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the exchange rate between U.S. dollar and RMB because the value of our business is effectively denominated in RMB, while our ADSs will be traded in U.S. dollars.

The conversion of RMB into foreign currencies, including U.S. dollars, is based on rates set by the PBOC. The PRC government allowed the RMB to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed the RMB to appreciate slowly against the U.S. dollar again, and it has appreciated more than 10% since June 2010. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.

To the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amounts available to us.

We estimate that we will receive net proceeds of approximately US$             million from this offering if the underwriters do not exercise their option to purchase additional ADSs, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, based on the initial offering price of US$             per ADS, the midpoint of the estimated initial public offering price range shown on the cover page of this prospectus. Assuming that we convert the full amount of the net proceeds from this offering into RMB, a 10% appreciation of the U.S. dollar against the RMB, from the exchange rate of RMB6.1990 for US$1.00 as of

 

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March 31, 2015 to a rate of RMB6.8189 to US$1.00, will result in an increase of RMB             million in our net proceeds from this offering. Conversely, a 10% depreciation of the U.S. dollar against the RMB, from the exchange rate of RMB6.1990 for US$1.00 as of March 31, 2015 to a rate of RMB5.5791 to US$1.00, will result in a decrease of RMB million in our net proceeds from this offering.

Interest Rate Risk

We have not been exposed to material risks due to changes in market interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure. However, we cannot provide assurance that we will not be exposed to material risks due to changes in market interest rate in the future.

After the completion of this offering, we may invest the net proceeds we receive from the offering in interest-earning instruments. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.

Recent Accounting Pronouncements Adopted

In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update (“ASU”) 2014-08, which amends the definition of a discontinued operation in ASC 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued-operations criteria. The new guidance eliminates the second and third criteria of discontinued operation in ASC 205-20-45-1 and instead requires discontinued-operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. The ASU also expands the scope of ASC 205-20 to disposals of equity method investments and businesses that, upon initial acquisition, qualify as held for sale.

The ASU also requires entities to reclassify assets and liabilities of a discontinued operation for all comparative periods presented in the statement of financial position. Regarding the statement of cash flows, an entity must disclose, in all periods presented, either (1) operating and investing cash flows or (2) depreciation and amortization, capital expenditures, and significant operating and investing noncash items related to the discontinued operation.

The ASU is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. We do not expect the adoption of this guidance will have a significant effect on its consolidated financial statements.

In May 2014, the FASB issued, ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The guidance substantially converges final standards on revenue recognition between the FASB and the International Accounting Standards Board providing a framework on addressing revenue recognition issues and, upon its effective date, replaces almost all exiting revenue recognition guidance, including industry specific guidance, in current U.S. generally accepted accounting principles.

The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:

 

    Step 1: Identify the contract(s) with a customer.

 

    Step 2: Identify the performance obligations in the contract.

 

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    Step 3: Determine the transaction price.

 

    Step 4: Allocate the transaction price to the performance obligations in the contract.

 

    Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We are in the process of evaluating the impact of adoption of this guidance on its consolidated financial statements.

 

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INDUSTRY

Background

Consumption in China is growing rapidly but remains underfinanced, suggesting tremendous growth potential for China’s consumer finance market.

Consumption in China has experienced rapid growth as a result of China’s economic development and rising consumption power among Chinese consumers. According to the National Bureau of Statistics of China, China’s GDP increased from RMB47.3 trillion in 2011 to RMB63.6 trillion (US$10.3 trillion) in 2014, while annual per capita disposable income increased from RMB14,582 in 2011 to RMB20,167 (US$3,253) in 2014. Consumption has increasingly become an important driver of China’s GDP growth, with the ratio of final consumption to GDP reaching 49.8% in 2013, according to the National Bureau of Statistics of China. “Final consumption” is the total expenditure of residents on the consumption of goods and services in a certain period, namely the expenditure of residents for purchases of goods and services from the domestic economic territory and abroad to meet the requirements of their daily life, and excludes the expenditure of non-residents on consumption in the economic territory of the country. While China’s ratio of final consumption to GDP in 2013 was the highest in six years, it was still relatively low compared to the corresponding figure for the U.S. in the same period, which was 83.2% according to the World Bank, suggesting tremendous future potential. We believe the United States market, which is characterized by high levels of consumption and high consumption loan balance to GDP ratios, provides a good proxy for the way the China market may develop given the rapid growth of China’s economy, China’s large and expanding consumer base and the Chinese government’s policies to encourage consumption. As consumption level in China continues to rise, we believe China’s consumer finance market will develop in ways similar to the United States in order to address unmet consumer demand.

China’s Consumer Finance Market

Despite growing consumption levels, consumption in China is underfinanced. According to iResearch, China’s consumption loan balance to GDP ratio was merely 22.8% in 2013, compared to 82.9% for the United States during the same period, suggesting significant growth potential. “Consumer finance” consists of loans granted to consumers for purchasing consumption goods and services. Consumption in China is underfinanced primarily because loans from traditional financial institutions are not easily accessible. For example, to obtain a bank loan, a potential borrower needs to physically go to a bank branch. However, most bank branches offering consumption loans are located only in tier 1 and tier 2 cities. In addition, the application process for a bank loan is complex and time-consuming. The ineffectiveness of traditional financial institutions at serving the consumer finance market indicates huge business opportunities for alternative credit providers. China’s consumption loan balance is estimated to have reached RMB15.9 trillion (US$2.6 trillion) by the end of 2014, and is expected to further grow at a CAGR of 18.6% to RMB37.4 trillion by the end of 2019, according to iResearch. The development of new financial services and products will be one of the key growth drivers.

 

LOGO

Source: iResearch.

 

 

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The consumer finance market consists of secured consumption loans such as car loans and housing mortgage, and unsecured consumption loans such as credit cards and other unsecured loans from banks and consumer financing companies. Out of the two, unsecured consumption loans show stronger growth potential. According to iResearch, China’s unsecured consumption loan balance is estimated to have reached RMB3.6 trillion (US$580.7 billion) by the end of 2014, and is expected to further grow at a CAGR of 25.7% to RMB11.4 trillion by the end of 2019, which is higher than the expected growth rate of the consumer finance market in general. Key drivers behind the expected growth in China’s unsecured consumer finance market include the penetration of consumer finance into more consumption categories, the continued development of a nationwide personal credit information database, which improves the ability of lenders to evaluate potential borrower risk, and credit providers’ increasing awareness of the business opportunity in the sector.

 

LOGO

Source: iResearch

Opportunities for Marketplaces Connecting Borrowers and Investors

China’s rapidly growing consumption levels and relatively limited consumer finance options have created opportunities for marketplaces that connect borrowers and investors. According to iResearch, transaction values for marketplaces that focus on consumption loans, or consumer finance marketplaces, are expected to grow from RMB12.7 billion (US$2.0 billion) in 2014 to RMB521.4 billion in 2019, representing a CAGR of 110.1%. The primary drivers for the growth of consumer finance marketplaces include the growing consumption market and increasing demand for consumer finance. In addition, it is also driven by consumers’ need for higher borrowing limits and convenient transaction processing, and improving credit assessment capabilities made possible through the application of big data analytics.

 

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LOGO

Source: iResearch

 

Online Consumer Finance Marketplaces with the Strongest Growth Potential

In particular, within consumer finance marketplaces in China, pure online marketplaces that focus on consumption loans to individuals, or online consumer finance marketplaces, show the strongest growth potential. According to iResearch, transaction values through online consumer finance marketplaces are expected to grow from RMB4.6 billion (US$742.1 million) in 2014 to RMB247.6 billion in 2019, representing a CAGR of 122.2%, which is even higher than the expected growth rate for consumer finance marketplaces in general. The additional drivers for growth of online consumer finance marketplaces include increased internet and mobile penetration among consumers, the emergence of online marketplaces and ecommerce platforms that drive consumer behavior from offline to online, as well as the ability to realize comparatively lower user acquisition costs and higher operating efficiencies. According to iResearch, in 2014, Yirendai ranked first among online consumer finance marketplaces in China, as measured by transaction value.

 

 

LOGO

Source: iResearch

 

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BUSINESS

Our Mission

Our mission is to provide consumers in China with easy access to affordable credit and investors with attractive investment opportunities through our online marketplace.

Overview

We are China’s largest online consumer finance marketplace connecting investors and individual borrowers as measured by transaction value in 2014, according to iResearch. We facilitated over RMB4,113.1 million (US$663.5 million) in loans from our inception in March 2012 through March 31, 2015.

Our online platform automates key aspects of our operations and enables us to efficiently match borrowers with investors and execute loan transactions. Leveraging the extensive experience of our parent company, CreditEase, a large diversified financial services company which began operations in 2006, we provide an effective solution to address largely underserved investor and individual borrower demand in China. Our borrowers and investors come from a variety of channels, including online sources, such as the internet and our mobile applications, as well as offline sources, such as referrals from CreditEase’s on-the-ground sales network. In 2014 and the first quarter of 2015, we facilitated over RMB550.8 million (US$88.9 million) and RMB464.6 million (US$74.9 million) in loans through our mobile applications, respectively, representing 24.7% and 28.7% of the total amount of loans facilitated through our marketplace in the respective periods.

Between 2014 and 2019, China’s unsecured consumer finance market is forecasted to grow at a CAGR of 25.7% from an estimated RMB3.6 trillion to RMB11.4 trillion (US$1.8 trillion) in terms of outstanding loan balance, according to iResearch. As we continue to expand our business, we believe that we will be well positioned to capture market opportunities in China.

We currently target prime borrowers, comprising credit card holders with salary income. We strategically focus on prime borrowers as we believe members of this group tend to be more creditworthy and more receptive to internet finance solutions. In the future, we will expand to serve new borrower groups beyond prime borrowers, enabling us to capture the opportunities presented by China’s growing unsecured consumer finance market. Our online marketplace offers qualified borrowers who successfully complete our online application and meet our borrower requirements quick and convenient access to affordable credit at competitive prices. All of the loans facilitated through our marketplace feature fixed interest rates. To provide a transparent marketplace, the interest rates, service fees and other charges are all clearly disclosed to borrowers upfront.

Our online marketplace provides investors with attractive risk-adjusted returns from a quality asset class with investment thresholds as low as RMB100 (US$16.1). Investors have the option to individually select specific loans to invest in or to use our automated investing tool to identify and select loans on the basis of a targeted return. We also offer investors credit enhancement service in the form of a risk reserve fund and provide a liquid secondary market for investors. We currently conduct our business operations exclusively in China, and our online consumer finance marketplace does not facilitate investments by investors located in the United States.

We believe we have developed an industry leading risk management system using our proprietary credit decisioning and fraud detection modules. We accumulate data from our expanding borrower base and CreditEase’s extensive database to continually enhance the sophistication and reliability of our risk management system. Our proprietary risk management system enables us to assess the creditworthiness of borrowers more effectively in a market where reliable credit scores and borrower databases are still at an early stage of development. This system also enables us to appropriately price the risks associated with borrowers and offer quality loan investment opportunities to investors.

We generate revenues primarily from fees charged for our services in matching investors with individual borrowers and for other services we provide over the life of a loan. Our revenues include transaction fees, service fees and other revenues, with the majority of our historical revenues coming from transaction fees. We serve as an information intermediary, and do not assume credit risk or use our own capital to invest in loans facilitated through our marketplace.

 

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We have experienced significant growth since we launched our marketplace in March 2012. Our total net revenues increased from US$3.1 million in 2013 to US$31.9 million in 2014, and increased from US$2.1 million for the three months ended March 31, 2014 to US$35.1 million for the three months ended March 31, 2015. We had net losses of US$8.3 million and US$4.5 million in 2013 and 2014, respectively. For the three months ended March 31, 2015, we had net income of US$7.6 million, compared to a net loss of US$3.7 million for the three months ended March 31, 2014.

Our Solution

We are China’s largest online consumer finance marketplace connecting investors and individual borrowers as measured by transaction value in 2014, according to iResearch. Our marketplace embraces the significant opportunities presented by a financial system that leaves many creditworthy individuals underserved or even unserved. Our online business model, empowered by a technology-driven and user-centric platform, allows us to efficiently match borrowers with investors. We provide borrowers with fast and convenient access to consumer credit at competitive rates, while we offer investors easy and quick access to an alternative asset class with attractive risk-adjusted returns.

 

LOGO

 

* Prior to June 2015, borrower and investor funds were deposited into a custody account managed by any one of a number of established third party online payment platforms. In June 2015, we migrated to a new system whereby China Guangfa Bank, one of the largest commercial banks in China, took over the custody accounts previously managed by the various third party payment platforms.

Benefits to Borrowers

We provide the following benefits to borrowers, which have enabled us to achieve the No. 2 ranking in terms of borrower satisfaction among our industry peers in 2014, according to a customer survey conducted by iResearch.

 

    Access to consumer credit. Borrowers are significantly underserved by the current consumer finance system in China, which provides insufficient access to funds or, in some cases, no access at all. For example, individual credit card holders in China on average hold aggregate personal credit limits of less than RMB20,000, according to iResearch. We provide prime borrowers with access to consumer credit on terms that are adjusted to borrowers’ risk profiles and in amounts which are suitable to finance certain large consumption expenditures, such as those for home renovations, vehicle purchases, traveling and continuing education. Our pricing grades are designed to allow us to further segment our target prime borrower group to offer customized loans.

 

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    Quick and convenient access. We provide borrowers with an online loan application and management platform that can be accessed anytime, anywhere through our website and mobile applications. For express loan products, borrowers are able to finish the application process in three steps taking as little as ten minutes. We also provide borrowers with access to live support and easy-to-use online tools throughout the application process and for the lifetime of the loan.

 

    Fast credit approval. We leverage online data and technology to quickly assess risk, determine a credit rating and assign a pricing grade. For express loan products, qualified borrowers can receive an initial decision in as fast as ten minutes. We provide borrowers with faster credit decisioning compared to traditional sources of consumer credit in China, which may take weeks to provide a decision.

 

    Competitive rates and payments. Our proprietary credit decisioning system prices the risk associated with consumers, which are not sufficiently covered and hence not well priced by traditional banks in China. For example, borrowers who qualify for our Grade A loans pay interest rates and fee charges as low as 16.9% on an APR basis, which is competitive with the rates charged by traditional banks on credit cards. Furthermore, the loans on our marketplace have a variety of tenures, such as 12, 18, 24, 36 or 48 months, allowing borrowers to better manage their cash flows and build financial discipline by making repayments spread out over a period of time that suits their budgets and schedules.

 

    Transparent marketplace. We offer borrowers a transparent end-to-end process with foreseeable turnaround times and clear documentation requirements. All of the loans facilitated through our marketplace feature fixed interest rates, which together with service fees and prepayment and late payment penalties, are clearly disclosed to borrowers during the application process.

Benefits to Investors

We provide the following benefits to investors, which have enabled us to achieve the No. 1 ranking in terms of investor satisfaction among our industry peers in 2014, according to a customer survey conducted by iResearch.

 

    Access to a new asset class. We provide investors with access to a new investment opportunity that is outside the traditional and limited investment channels available to investors in China. We offer investors the ability to lend over our marketplace with investment thresholds as low as RMB100 (US$16.1), permitting diversification across different loans. In 2014 and the first quarter of 2015, the average loan investment sizes through our marketplace were RMB12,370 (US$1,995) and RMB20,044 (US$3,233), respectively.

 

    Attractive risk-adjusted returns. We offer investors attractive risk-adjusted returns, which range from 7.0% to 12.5% on an annualized basis after fees. Our focus on prime borrowers and our credit screening capabilities help to improve the reliability of returns obtained through our marketplace.

 

    Easy and quick access. We offer investors 24/7 access to all available services through our website and mobile applications. We provide investors with online tools that automatically invest a specified amount of funds committed by the investor according to investor-specified criteria, including desired rate of return and tenure.

 

    Credit enhancement. We offer investors a credit enhancement service in the form of a risk reserve fund. Under this arrangement, we collect from borrowers an amount equivalent to a certain percentage, currently at 6%, of all loans facilitated through our marketplace, and set aside such amount in a custody account which is used to pay investors the principal and accrued interest on their overdue loans.

 

    Liquid secondary market. With an average of over 129,700 transactions taking place on our secondary marketplace every month during the first quarter of 2015, we provide investors with a liquid secondary market where they can sell their loans to other investors at any time before maturity. On average, each secondary transaction took less than one day to complete in the first quarter of 2015.

 

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Our Strengths

We believe the following competitive strengths contribute to our success and differentiate us from our competitors:

China’s leading online consumer finance marketplace connecting investors and individual borrowers

We are China’s largest online consumer finance marketplace connecting investors and individual borrowers as measured by transaction value in 2014, according to iResearch. From our inception in March 2012 through March 31, 2015, we successfully facilitated loans between over 54,800 investors and over 70,800 borrowers, representing an aggregate value of approximately RMB4,113.1 million (US$663.5 million). By utilizing a highly scalable platform and online business model, we have been able to grow the scale of our marketplace and reinforce our strengths through network effects, allowing us to reach over 3,867,600 registered users as of March 31, 2015. We believe our scale, brand, risk management capabilities and technology platform allow us to effectively attract new participants, lower costs for borrowers, provide high-quality loan investment opportunities, create higher liquidity and thus continuously reinforce our market leading position.

Superior user experience

We offer a superior user experience to borrowers and investors, helping us to achieve industry leading customer satisfaction rates. According to a customer survey conducted by iResearch, we ranked No. 1 in terms of investor satisfaction rate and No. 2 in terms of borrower satisfaction rate among our industry peers in 2014. The iResearch survey included (i) most of the top 20 marketplaces connecting borrowers and investors in terms of transaction value during the first half of 2014, which iResearch believes to have competitive strengths and be representative of the participants in the industry, (ii) additional marketplaces that iResearch considered well-known, for example, those backed by well-known large Chinese companies or considered industry pioneers, and (iii) additional marketplaces named by survey participants, who had the option to add marketplaces to the existing list provided in the survey. According to iResearch, only those marketplaces rated by at least 40 survey participants were included in the final rankings.

We provide borrowers with quick and convenient access to credit at affordable and competitive rates through our online platform that is accessible anytime, anywhere. In 2014, we facilitated loans to 39,344 borrowers through our platform, compared with loans to 3,549 borrowers in 2013, and in the first quarter of 2015, we facilitated loans to 27,581 borrowers, compared with loans to 2,487 borrowers in the first quarter of 2014. Approximately 24.7% and 26.9% of loans in terms of amount were facilitated through our mobile applications in 2014 and the first quarter of 2015, respectively, representing over RMB550.8 million (US$88.9 million) and RMB435.4 million (US$70.2 million) in loans, respectively.

We offer investors easy and quick access to an alternative asset class with attractive risk-adjusted returns, as well as a superior user experience. 34,527 investors made investments through our platform in 2014, compared to 5,617 investors in 2013, with the average amount invested by each investor increasing from RMB52,751 in 2013 to RMB75,480 (US$12,176) in 2014. In the first quarter of 2015, 25,124 investors made investments through our platform compared to 4,971 investors in the first quarter of 2014, with the average amount invested by each investor increasing from RMB40,781 in the first quarter of 2014 to RMB69,649 (US$11,236) in the first quarter of 2015. In 2014, 43.5% of investors were repeat users of our platform, defined as those investors who made two or more investments through our platform during the year.

Proprietary risk management system

We take a holistic approach to managing risk. We currently target prime borrowers, which we believe represent a superior risk profile compared to the borrower base served by our industry peers. Our proprietary risk management system enables us to evaluate potential borrowers in a market where reliable credit scores and

 

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borrower databases are still at early stage of development. Our system is built upon data accumulated through our operations and is further supported by an extensive database accumulated by CreditEase over the past nine years. Our risk management model utilizes big data capabilities, including a proprietary analytics engine and algorithms, to automatically evaluate the credit characteristics of borrowers. At the same time we use automated verification and fraud detection tools to ensure the quality of the loans facilitated through our marketplace. We supplement these technology driven systems with manual verification and fraud prevention processes when necessary. We consistently upgrade our risk management model with new credit data and technologies. To date, our risk management system utilizes over 300 decisioning rules and contains a blacklist with over 200,000 fraud detection data points. We believe our risk management is prudent, as evidenced by the performance of various loan vintages facilitated through our marketplace.

We have established a stringent risk management culture by setting up an independent risk management division, embedding risk management into employee performance reviews and implementing a systematic and regular risk management training program.

Powerful network effects

Our online marketplace benefits from powerful network effects that increase as the number of participants and transactions on our platform grow. Leveraging CreditEase’s experience, we have established the brand and scale that attract growing numbers of investors and borrowers, and have become a leader in the online consumer finance marketplace industry. The increase in the number of investors enables us to better match investors with borrowers. As our scale increases, higher transaction volumes generate more data that we can leverage to improve the effectiveness of our credit decisioning model, enabling us to improve borrower screening and to provide higher quality credit assets to investors. Improved investment performance increases investor trust in our marketplace, lowering the risk premiums are charged for lending through our platform and allowing us to offer more competitive rates to attract additional high-quality borrowers. The result is a virtuous cycle for our business whereby the performance of our marketplace continuously improves. We believe that these network effects will further reinforce our market leadership position.

Scalable and robust technology platform

Our technology platform powers our online marketplace, enabling us to connect investors and individual borrowers in a fast and effective way and to efficiently deliver services to them. Our platform covers the entire loan transaction process, including application, verification, credit assessment, decisioning, listing, funding, servicing and collections, and provides a flexible, cost-efficient and time-saving mechanism for matching borrowers and investors when compared to traditional banking institutions. Our technology platform also facilitates our user-friendly mobile applications, which allow our users to invest and borrow anytime, anywhere. We believe our mobile efforts have been validated by our users. Approximately 24.7% and 26.9% of loans in terms of amount were facilitated through our mobile applications in 2014 and the first quarter of 2015, respectively. Our platform is further enhanced by our big data capabilities that automate and streamline our data extraction and mining efforts, our automated fraud detection systems and proprietary application programming interfaces (APIs). In addition, we have adopted robust security measures and policies to protect our customer information and proprietary data, and have deployed multiple layers of redundancy to ensure the reliability of our platform.

Visionary founder and experienced management team

Our founder and executive chairman, Ning Tang, was a pioneer in China’s peer-to-peer lending service industry. Other members of our management team have on average more than ten years of experience and all have held senior positions with various financial institutions and large companies prior to joining us. Together with Mr. Tang, they started our company with the vision of becoming the leading online consumer finance marketplace connecting investors and individual borrowers in China. Their deep understanding of the consumer finance market in China contributed to our strategic decision to focus on the prime individual borrower market.

 

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Our Strategies

Our mission is to provide consumers in China with easy access to affordable credit and investors with an attractive investment opportunities through our online marketplace. We intend to achieve this goal by pursing the following strategies:

Continue to define industry best practices in China

We will leverage the strengths of our marketplace to continue to grow our market share in China’s online consumer finance marketplace industry in terms of both loan volume and participants. By focusing on the long-term sustainable growth of our marketplace, we seek to mitigate the risks inherent in expanding credit markets. To this end, we strive to create and uphold industry best practices for all aspects of our business, including credit risk management and analysis, operational transparency, fund settlement and data security. For example, we have recently partnered with China Guangfa Bank, one of the largest commercial banks in China, to establish a third-party custody and settlement arrangement to better protect investors and borrowers. Pursuant to the agreement we have entered into with China Guangfa Bank, China Guangfa Bank has set up custody accounts for the funds loaned through our online consumer finance marketplace and our risk reserve fund, and manages the settlement of funds to and from these custody accounts, in exchange for which we pay China Guangfa Bank a fee for its custody and settlement services. The agreement is of an indefinite duration, and we may terminate the agreement upon 15 business days advance notice. We do not expect the service fees to be paid to China Guangfa Bank will account for a material portion of our total operating costs and expenses. We believe this arrangement is the first of such kind in China and sets the best practice in the industry. In order to ensure the growth and stability of our marketplace, we will leverage our deep understanding of China’s consumer finance market to develop our credit enhancement service in a manner that balances the needs of regulators and our customers. Separately, through CreditEase’s leadership in self-regulatory organizations such as the Internet Finance Committee operated under the PBOC, Beijing P2P Association, the industry’s first association that is officially registered and overseen by regulators, and the National Association of Small Loan Companies under the supervision of the CBRC and PBOC, we will continue to foster the sustainable growth of our industry by leading through example and our sharing of best practices.

Broaden our borrower base

We seek to grow the number of borrowers on our online marketplace through the introduction of new credit products and services. By tailoring products to specific borrower needs, we continually seek to attract new and repeat borrowers to our marketplace. We will leverage the success of our existing vertical loan products, such as those for IT professionals, to expand our customized loan products to new industry verticals. By targeting specific borrower segments with specialized loan products, we intend to increase the conversion rate of interested individuals into successfully qualified borrowers. In the future, we expect repeat borrowers will become an increasingly important source of our borrower base and we will design specific products and services to cater to this group. We will also expand to serve new borrower groups beyond prime borrowers, enabling us to capture the opportunities presented by China’s growing unsecured consumer finance market. In addition, we will continue to leverage new technologies, such as mobile applications, to make the borrower loan application and investor matching process more efficient and transparent, attracting more borrowers to our marketplace. As consumers in China become increasingly receptive to utilizing online consumer financial services in general, we believe the improvements to our platform made possible by the further use of technology will enable us to acquire an increasing majority of borrowers through internet and mobile acquisition channels.

As our marketplace continues to grow, we plan to expand our ability to offer dynamic loan pricing. For example, we plan to introduce risk-based pricing for borrowers that optimizes loans based on individual credit criteria so that borrowers will be able to receive customized loans tailored to their own credit profile. In addition,

 

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we intend to introduce market-based pricing of loans based on macroeconomic factors and we believe such ability to continually adjust the pricing of the loans on our marketplace will allow us to better meet the real-time needs of our borrowers.

Expand our investor base

We strive to increase the overall number of investors and the amounts they lend through our marketplace by facilitating investments in a diversified portfolio of high-quality loan products. We will continue to develop new investment products, such as diversified term investment products and products with lower investment thresholds, to satisfy different investor requirements. For our existing investors, we will implement strategies to increase the share of their assets invested through our marketplace over time. To this end, we intend to provide investors with enhanced tools to better monitor and manage their investments on our online marketplace, and to continue to enhance the liquidity of our marketplace by growing the number and type of loans traded on our platform. In the future, we plan to segment loans into more precise tiers of returns, and seek to offer investors a more diverse array of loan products that better meet their risk-adjusted return targets. We also plan to offer more valued-added services to investors, such as investment portfolio services. Furthermore, we will seek to expand our investor base from our current focus on individual investors to also include institutional investors.

Further enhance our risk management capabilities

As transaction volumes on our marketplace grow, the data generated from these transactions will allow us to further enhance our risk management systems. We will continue to automate our risk management system by enhancing our online data analytics capabilities. At the same time, we will enhance these data analytics systems by utilizing additional data sources, such as from additional online verticals and third-party partners, for inclusion in our models to uncover new insights about individual borrowers, and to allow us to evaluate and facilitate lending to more borrowers. We will also further advance our proprietary algorithms that analyze behavioral data, transactional data and employment information in order to increase the automation and predictive capabilities of our credit and risk management systems. These will enable us to further increase the efficiency of our marketplace while maintaining sophisticated risk management capabilities to ensure expected returns and manageable risks.

Aggressively execute our mobile strategy

We have made and will continue to make significant investments in pursuing our mobile strategy. As we expect customers will increasingly submit loan applications or make investments from their mobile devices, we plan to further strengthen our mobile internet presence to seize promising market opportunities by developing targeted marketing programs directed at mobile users. Approximately 24.7% and 26.9% of loans in terms of amount were facilitated through our mobile applications in 2014 and the first quarter of 2015, respectively. We will improve the functionality of our mobile applications in order to improve mobile user experience, make our marketplace more convenient and accessible to users in China and enhance the stickiness of our platform. We also plan to develop and introduce more mobile related products, such as lifestyle applications incorporating loan products that serve the borrowers’ financing needs in their daily life. As we aggressively execute our mobile strategy, we will utilize the additional information available from mobile users, such as location data, to further enhance our risk management capabilities.

Continue to invest in our technology platform

We will continue to make significant investments in our proprietary technologies in the areas of data collection and processing algorithms to increase the precision, speed and scale at which we match the demand and supply of funds. Enhanced data analytics will also improve our conversion of online leads into successful borrowers and investors. With the further application of big data, we will seek to acquire members of our target borrower and investor groups in a more focused and cost efficient way. Furthermore, we will continue to

 

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leverage technology to further automate our processes and improve efficiency. At the same time, we will also benefit from the operating leverage associated with our scalable platform as our scale grows. We believe these investments will facilitate the long-term growth of our marketplace.

Cultivate a vibrant consumer lending ecosystem

We will expand strategic relationships with key industry value chain partners to further increase the value of our marketplace and better serve borrowers and investors. We have relied on CreditEase for the successful operation of our online consumer finance marketplace. Currently, a significant portion of borrowers and investors on our marketplace were acquired through CreditEase, and we outsource all of our collections process to CreditEase. Although we expect that CreditEase will continue to provide us with such services going forward based on the service agreements that we plan to enter into with CreditEase prior to the completion of this offering, we will expand our strategic relationships with other user acquisition channels, especially online channels, and third-party collection agents. For example, in June 2015 we migrated to a new third-party custody and settlement arrangement whereby China Guangfa Bank took over borrower and investor custody accounts that were previously managed by various third-party payment platforms. In addition, in the future, we may partner with traditional financial institutions to combine the efficiency advantages of online consumer finance marketplaces with the low funding costs of traditional financial institutions. In addition, we may expand cooperation with merchants in more sectors, thereby expanding the breadth of potential transactions conducted on our marketplace beyond consumer finance to other forms of consumption. We may also pursue strategic investments and partnerships that complement our online marketplace, improve our technologies, enhance our user experience and strengthen our market leading position.

We will continue to promote the positive development of the online consumer finance marketplace industry in China through long-term partnerships with government institutions to advocate for the adoption of an industry-wide credit scoring system to better protect borrowers and investors. For example, in December 2014 our executive chairman, Mr. Ning Tang, helped to establish and was elected chairman of the Beijing P2P Association, the industry’s first association that is officially registered and overseen by regulators. In addition, we have developed online forums to educate borrowers and investors and to promote greater awareness of the benefits and risks of online consumer finance. In the future, we will continue to develop venues and methods to educate potential participants in our marketplace.

Our Borrowers

Target Borrower Group

We currently target prime borrowers, comprising credit card holders with salary income. We strategically focus on prime borrowers because we believe members of this group tend to be more creditworthy and receptive to internet finance solutions. According to iResearch, the number of credit card holders in China is expected to have reached 281.7 million in 2014.

Borrower Profile and Base

Based on the information disclosed to us, as of March 31, 2015, our historical borrower profile was 82.8% male and 17.2% female, while 78.6% were 35 years of age or less.

In 2014, we facilitated loans to 39,344 borrowers through our platform, compared with 3,549 borrowers in 2013, and in the first quarter of 2015, we facilitated loans to 27,581 borrowers, compared with loans to 2,487 borrowers in the first quarter of 2014. The total amount of funds loaned to borrowers through our platform was RMB2,228.6 million (US$359.2 million) in 2014, which increased substantially from RMB258.3 million in

 

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2013. In the first quarter of 2015, the total amount of funds loaned to borrowers through our platform was RMB1,620.8 million (US$261.5 million), compared with RMB169.7 million in the first quarter of 2014.

Borrower Acquisition

We attract a fast growing number of borrowers through various online channels. Our online borrower acquisition efforts are supported by our big data capabilities and are primarily directed toward search engine marketing, search engine optimization and mobile application downloads through major application stores, as well as various marketing campaigns.

We also acquire borrowers through CreditEase’s extensive on-the-ground sales network across over 180 locations in China as part of our contractual arrangement with CreditEase. Under this arrangement, CreditEase is obligated to refer borrowers who fall within our target borrower group to our online marketplace, in exchange for which we pay CreditEase a referral fee. Once a borrower is referred to us, all the remaining aspects of the transaction life cycle are handled by us, with our online marketplace facilitating the loan transaction, from application to credit decisioning to matching and servicing. Our referral arrangement with CreditEase is designed so that CreditEase does not compete with our online consumer finance marketplace business. See “Our Relationship with CreditEase.” In 2013, 2014 and the first quarter of 2015, 54.2%, 48.1% and 45.3% of our borrowers were acquired through CreditEase, respectively. The average size of loans sourced through offline channels tends to be larger than that of loans sourced through online channels.

Our Investors

Target Investor Group

We accept investments from investors of all income levels. However, we focus our efforts on attracting mass affluent investors. This large and rapidly growing sector of the Chinese population is currently underserved by traditional investment products in China. We seek to attract mass affluent investors because members of this demographic group are a significant untapped source of capital. In the future, we plan to expand our investor base from our current focus on individual investors to also include institutional investors.

Investor Profile and Base

Based on the information disclosed to us, as of March 31, 2015, our historical investor profile was 55.8% male and 44.2% female, while 90.1% were 40 years of age or less.

In 2014, 34,527 investors made loans through our platform, compared with 5,617 investors in 2013, and in the first quarter of 2015, 25,124 investors made loans through our platform, compared to 4,971 investors in the first quarter of 2014. The total amount of funds loaned by investors through our marketplace was RMB2,606.1 million (US$420.4 million) in 2014, compared with RMB296.3 million in 2013. In the first quarter of 2015, the total amount of funds loaned by investors through our marketplace was RMB1,749.9 million (US$282.3 million), compared with RMB202.7 million in the first quarter of 2014.

Investor Acquisition

We attract a fast growing majority of our investors through online channels. Our investor acquisition efforts are primarily directed towards enhancing our brand name, building investor trust, and word-of-mouth marketing. We also recruit investors through CreditEase’s on-the-ground sales network, which refers potential investors to our marketplace who have expressed interest in the types of loan products offered on our online marketplace.

 

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Our Products and Services

Products Offered to Borrowers

Our online marketplace facilitates standard loan products, express loan products and vertical loan products to borrowers. For the loan products we facilitate, the APR paid by borrowers is between 16.9% and 39.5%, with the specific rate charged dependent upon a risk assessment of the borrower. We believe that these loans are simple and quality credit products that make it easy for borrowers to budget their repayment obligations and meet their financial needs. All of our loan products are unsecured, feature fixed monthly payments and offer terms of 12, 18, 24, 36 or 48 months. Typical uses for these loan products include home remodels, durable good purchases, travel and continuing education.

Standard Loan Products

In 2014 and the first quarter of 2015, the average loan amounts for our standard loan products were approximately RMB66,187 (US$10,677) and RMB74,608 (US$12,035), respectively, although our standard loans can be as high as RMB500,000 (US$80,658). To apply for a standard loan, a borrower needs to complete a short online application providing information such as their PRC identity card information, a bank statement with proof of monthly income and credit report from the PBOC, as well as the desired loan amount and term. In 2014 and the first quarter of 2015, our standard loan products represented the majority of the loans that were made through our marketplace.

Express Loan Products

FastTrack loans. FastTrack loans are a new, fast expanding product that is currently only available through our mobile applications. These loans can be as high as RMB100,000 (US$16,132). In 2014 and the first quarter of 2015, the average FastTrack loan amounts were RMB36,328 (US$5,860) and RMB34,355 (US$5,542), respectively. To apply for a FastTrack loan, a borrower completes a short online application providing their PRC identity card information, e-commerce account information, mobile phone number and a credit card statement as well as the desired loan amount and duration. This product offers near instantaneous credit approval, allowing qualified borrowers to receive an initial decision in as fast as ten minutes.

Vertical Loan Products

We currently offer vertical loan products to IT professionals, and plan to offer similar types of loan products targeted at other industry verticals in the future. Our IT professional loans are a relatively new program that is experiencing rapid growth. This product is currently aimed specifically at IT professionals working at large, established internet technology companies. Like our standard and express loans products, IT professional loans are unsecured. The average IT professional loan amount was RMB50,392 (US$8,129) in 2014 and RMB46,097 (US$7,436) in the first quarter of 2015. Typical uses for IT professional loans are similar to those for our standard loan products and express loan products. To apply for an IT professional loan, a borrower needs to provide information such as their employment information, PRC identity card information, a bank statement with proof of monthly income and a credit report from the PBOC, as well as the desired loan amount and term.

Loan Pricing Mechanism

We price loans facilitated through our marketplace using a pricing grid with four segments, each with a rate calculated to correspond to a risk assessment of borrowers falling within that particular segment. Once a borrower’s credit information is input into our proprietary credit scoring and loan qualification system, that system automatically decides which of the four segments the borrower falls under, and applies the fee rate for the relevant segment to the borrower. Going forward, we plan to expand the number of segments contained in our pricing grid.

 

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Loans are quoted as a fee rate displayed as an APR, which comprises a fixed interest rate and a transaction fee rate we charge borrowers for our services. The APRs for the term loans on our marketplace range from 16.9% to 39.5%, enabling us to cover a broad range of high quality risk assets.

All of the loans offered through our marketplace feature fixed interest rates, which eventually go to the investor as a return for their investment, less any defaults over the term of the applicable loan and fees charged to investors. In addition, we charge borrowers transaction fees for matching them with investors. The transaction fees are charged as a percentage of the loan contract. A penalty fee is imposed as a percentage of the amount overdue in the case of late payment or a percentage of the outstanding principal loan amount in the case of prepayment. All fees are clearly disclosed to the borrower upfront.

Services Offered to Investors

Through our marketplace investors have the opportunity to invest in a wide range of loan products with attractive risk-adjusted returns. Our proprietary credit scoring and fraud detection systems allow investors to be confident that they are not only investing in high-quality loans but also lending through a sustainable marketplace.

Investing Tools

Our online marketplace provides investors with several investing tools.

Automated investing tool. Our automated investing tool represents the most popular way for investors to extend loans to borrowers through our marketplace. With our automated investing tool, an investor agrees to lend a specified amount of money to borrowers through our marketplace for a specified period of time. Once an investor commits funds using the tool, his funds are automatically allocated among approved borrowers. Our automated investing tool automatically reinvests investors’ funds as soon as a loan is repaid, enabling investors to speed the reinvestment of cash flows without having to continually revisit the site. In 2014 and the first quarter of 2015, the vast majority of funds loaned by investors through our marketplace were invested utilizing this automated investing tool.

The minimum threshold for a lending commitment made through our automated investing tool is RMB1,000 (US$161.2). In 2014 and the first quarter of 2015, the average amounts invested through our automated investing tool by each investor were RMB76,612 (US$12,348) and RMB71,910 (US$11,600), respectively, and the average annual rates of return to investors were between 7.0% and 10.0%. The specific rate of return offered to an investor using our automated investing tool varies with the duration of the investment term.

Self-directed investing tool. Our self-directed investing tool enables investors to personally select among the hundreds of new lending opportunities to approved borrowers that are posted on our marketplace every day. After selecting a desired loan, the investor then agrees to lend a specified amount of money to a specific borrower through our marketplace for a specified duration. Our platform provides investors using our self-directed investing tool with the ability to use filters based on credit and application data, such as term, amount and interest rate, to screen loans on our platform for review.

The minimum threshold for a lending commitment made through our self-directed investing tool is RMB100 (US$16.1). In 2014 and the first quarter of 2015, the average amounts invested through our self-directed investing tool by each investor were RMB51,570 (US$8,319) and RMB40,216 (US$6,487), respectively, and the average rates of return to investors were between 10.0% and 12.5%. The specific rate offered to an investor varies with the duration of the investment term.

 

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Credit Enhancement

In January 2015 we launched our new credit enhancement service in the form of a risk reserve fund. Under the current arrangement, we collect from borrowers an amount equivalent to a certain percentage, currently at 6%, of all loans facilitated through our marketplace into an interest-bearing custody account. The current risk reserve fund covers loans originated after January 1, 2015. If a loan originated after January 1, 2015 defaults, we will withdraw funds from the risk reserve fund to repay the principal and accrued interest for the defaulted loan, unless the risk reserve fund is depleted. The percentage of fees to be set aside in the risk reserve fund is reviewed on a regular basis. See “—Risk Management—Credit Enhancement.”

Secondary Loan Market

We maintain a secondary loan market on our marketplace where investors can trade the loans they hold. This secondary loan market is liquid, with the average loan exchanging hands within the same day it is posted. This liquidity offers investors the opportunity to enter and exit their investments without waiting until maturity, increasing their frequency and willingness to lend and, as a result, the amount of funds ultimately available to borrowers.

Fees Charged to Investors

We charge investors various on-going as well as one-time fees, depending on their specific investment activity on our marketplace. Investors using our automated investing tool are charged a monthly management fee, while investors using self-directed investing tool are charged an account management fee. A one-time fee is charged to all investors for each loan sold over our secondary loan market.

Our Platform and the Transaction Process

We believe that our platform enables a significantly faster loan application process, a credit assessment that more accurately determines an applicant’s creditworthiness and a superior overall user experience. Our platform touches each point of our relationship with our borrowers and investors, from the application process through the funding and servicing of loans.

We provide an automated, streamlined application process. To borrowers and investors alike, the process appears simple, seamless and efficient but our platform leverages sophisticated, proprietary technology to make it possible. The entire process from initial application to disbursement of funds typically takes one-to-two days.

Stage 1: Application

Our borrower application process begins with the submission of a loan application by a prospective borrower. Our borrowers apply through our website or mobile applications. As part of the application process, the prospective borrower is asked to provide various personal details. The specific personal details required will depend upon the borrower’s desired loan product, but typically include PRC identity card information, employer information, bank account information, credit card information and a credit report from the PBOC. For our FastTrack product, applicants may complete an application on our platform in three steps taking as little as ten minutes, significantly reducing the time normally spent applying for a loan.

New investors sign up to our marketplace using a simple online portal in which they input their PRC identity card information and bank account information. Prior to June 2015, the funds they invested over our marketplace were deposited into a custody account run by any one of a number of established third-party online payment platforms. In June 2015, we migrated to a new system whereby China Guangfa Bank took over the investor custody accounts previously managed by the various third party payment platforms.

 

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Stage 2: Verification

Upon submission of a completed application, our credit models are populated with all information contained in the submitted loan application. Additional data from a number of internal and external sources is then matched with the application, including the following:

 

Internal

•       historical credit data accumulated through our online platform; and

 

•       behavioral data that we glean from an applicant’s behavior as they apply to us for loans, such as the self-reported use of proceeds or use of multiple devices to access our platform;

External

•       credit database maintained by CreditEase;

 

•       personal identity information maintained by an organization operated under the Ministry of Public Security;

 

•       personal credit information maintained by an organization operated under the PBOC;

 

•       online data from internet or wireless service providers;

 

•       online shopping and payment information for their accounts with certain popular Chinese e-commerce websites; and

 

•       fraud list and database.

This data is then aggregated and used to verify an applicant’s identity, for possible fraud detection and for assessment and determination of creditworthiness.

Stage 3: Anti-Fraud, Credit Assessment and Decisioning

In order to efficiently screen applicants, we have designed an initial qualification phase to review the basic information regarding a prospective borrower that has been submitted with the application and gathered by us from available sources. As a matter of policy, we do not permit borrowers to hold more than one loan that has been facilitated through our platform at a time, although we currently do not have a comprehensive way to determine whether borrowers have obtained loans through other consumer finance marketplaces. Once complete, an initial check is performed using our anti-fraud system, and the prospective borrower’s loan application either proceeds to the next phase of the application process or the prospective borrower is notified of the decision to decline the application.

Following initial qualification, we commence a credit review utilizing our proprietary credit scoring model to generate an Yirendai score for the prospective borrower that drives the decision whether to extend credit. Our current proprietary credit-scoring model originates from a credit scoring system that was developed by CreditEase in conjunction with Fair Issac Corporation, or FICO, a leading U.S. provider of analytics software and tools used to manage risk and fight fraud. We have further modified our credit scoring system to adapt it to the realities of the Chinese market, which has historically had no source of widely available consumer credit information. Today, our credit scoring system uses our own scoring criteria, and is routinely monitored, tested, updated and validated by our risk management team. Following the generation of the Yirendai score, our credit decisioning system makes a determination as to whether the prospective borrower is qualified. Unqualified borrowers are notified of the decision to decline their applications for failing to meet minimum requirements. Applications from qualified borrowers applying for our express and vertical loan products proceed directly to the approval, listing and funding stage.

For borrowers who meet our minimum requirements the application for standard loan products then proceeds to our credit assessment team for review. A member of our credit assessment team will first conduct a telephone verification interview with the applicant. After the initial telephone verification interview, one junior and one senior member of our credit assessment team will analyze the application and Yirendai score. If a

 

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member of the credit assessment team suspects there may be fraud involved with a particular loan application or determines that additional verification is needed to complete the credit decisioning process, that team member will conduct further due diligence and verification, such as additional phone calls to the borrower applicant and the applicant’s employer that is identified in the application. While these additional steps have led us to discover instances of invalid information provided by prospective borrowers in the past, the number of such instances have not been significant. Following this review, the credit assessment team will either approve the loan as is, approve the loan with one or more modified sets of loan characteristics, or decline the loan application. In 2014 and the first quarter of 2015, 18.8% and 22.9% of all loan applications were approved, respectively.

Stage 4: Approval, Listing and Funding

Once the loan application is approved, we make a loan agreement available online for the prospective borrower’s review and approval. Upon acceptance of the loan agreement, if the loan has not been matched automatically through automated investing tool, the loan is then listed on our marketplace for investors to view. Once a loan is listed on our marketplace, investors may then subscribe to the loan using either our automated or self-directed investing tools. Before a loan is disbursed to the borrower, it must be fully subscribed to by investors. Our liquidity management system is designed to ensure the fast and effective matching of borrowers’ loan applications and investors’ investment demand through the use of detailed demand forecasting model and real time monitoring. Once a loan is fully subscribed, funds are then drawn from a custody account managed by China Guangfa Bank and disbursed to the borrower.

Stage 5: Servicing and Collections

We utilize an automated process for collecting scheduled loan payments from our borrowers. Upon loan origination, we establish a payment schedule with payment occurring on a set business day each month. Borrowers then make scheduled loan repayments via a third-party payment platform to a custody account, and authorize us to debit the custody account for the transfer of scheduled loan repayments to the lending investors. We check the balances in the custody account and reconcile the transactions against our records on a daily basis. As with the custody accounts used to hold and disburse investor funds, the custody accounts used to hold borrower re-payment funds are currently run by the various established third-party payment platforms we utilize, but are scheduled to migrate to a new system maintained by China Guangfa Bank in the second quarter of 2015.

To facilitate investor repayment, we have developed a strategy to optimize the collections process for delinquent loans. Our collections process is divided into distinct stages based on the severity of delinquency, which dictates the level of collection steps taken. For example, reminder text messages and emails are sent to a delinquent borrower as soon as a payment is missed, and if the payment is still outstanding, the collection team will make phone calls, then followed by visits to the delinquent borrower’s home. We outsource all stages of the collections process to CreditEase.

Risk Management

Traditional risk management tools and the types of consumer finance data available in developed economies, such as widely available consumer credit reporting services, are currently at an early stage of development in China. We believe our industry leading risk management capabilities provide us with a key competitive advantage in attracting capital to our marketplace by providing investors with comfort that they are investing in high quality loans through a sustainable marketplace.

Proprietary Fraud Detection System

We use a proprietary fraud detection system, which is part of our larger risk management system, to identify and reject potential borrower applications. Our system combines quantitative modeling, internet technology,

 

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offline verification and the use of third-party services. The quantitative modeling aspect of our fraud detection system involves the use of a big data platform to locate potential inconsistences in a particular borrower application. The internet technology aspect includes IP verification and monitoring. Our offline verification activities involve members of our credit assessment team speaking with potential borrowers to inquire after any inconsistences in a loan application. Our big data platform is also used to enhance our offline verification processes. Lastly, we employ third-party services to check the online behavior of potential borrowers, and utilize government agency’s open database to check their identity card numbers against known criminals. We also maintain a blacklist after detecting any fraudulent borrowers. To date, our risk management system utilizes over 300 decisioning rules and contains a blacklist with over 200,000 fraud detection data points.

Proprietary Credit Scoring Model and Loan Qualification System

We use a proprietary credit scoring model to assess the creditworthiness of potential borrowers. This credit scoring model originates from a credit scoring system that was developed by CreditEase in conjunction with FICO. We have further modified our credit scoring model to adapt it to the realities of the Chinese market, which has historically had no source of widely available consumer credit information. Our credit scoring model aggregates and analyzes the data submitted by the borrower as well as the data we collect from a number of internal and external sources, and then generates an Yirendai score for the prospective borrower. Our relationship with CreditEase allows us to further enhance the depth of our credit scoring model through our ability to rely on its nine years of loan data. In addition to its strong analytical foundation, our credit scoring model is routinely monitored, tested, updated and validated by our risk management team.

 

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The following table presents all the criteria that materially impact a borrower’s Yirendai score:

 

Criteria

  

Examples

  

Effect on Yirendai Score

Purpose of the loan

   Personal consumption   

•    No monotonic correlation

Customer attributes

   Education background   

•    Positive correlation

•    Higher education leads to higher Yirendai score

Usage and performance of the loans from other financial institutions

   Maximum amount of loans that the borrower has borrowed from commercial banks   

•    Positive correlation

•    The larger the amount of bank loans, the higher the Yirendai score

Credit card usage and payment pattern

   Frequency of credit card usage   

•    Negative correlation

•    Above a certain threshold, the higher the frequency of credit card usage, the lower the Yirendai score

Public record

   Court enforcement record   

•    No monotonic correlation

•    A borrower’s Yirendai score is lower if he/she has been subject to court enforcement

Income and debt condition

   Salaries   

•    Positive correlation

•    Below a certain threshold, the higher the salary, the higher the Yirendai score

Geographic location

   Province or city where the borrower is located   

•    No monotonic correlation

•    A borrower’s Yirendai score is lower if he/she is located in a province or city where we face intense market competition

Job stability

   Length of employment   

•    Positive correlation

•    The longer the employment, the higher the Yirendai score

Online merchant purchasing pattern

   Recent average consumption level   

•    Positive correlation

•    The higher the recent average consumption level, the higher the Yirendai score

The Yirendai scores derived from our proprietary credit scoring model containing the criteria mentioned above are used to determine which of the four segments in our current pricing grid a particular borrower falls into.

 

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Currently, to qualify for any of the four segments, a prospective borrower must first meet our definition of prime borrowers, and then meet the following additional minimum standards we set forth for each of the four segments:

 

Grade

  

Minimum standard

A

   healthy purchasing pattern with online merchants(1) and healthy credit card behavior(2) OR credit card holder with credit card limit of no lower than RMB70,000 (US$11,292) and monthly after tax income of no less than RMB10,000 (US$1,613)

B

   healthy purchasing pattern with online merchants(1) and stable credit card behavior(3)

C

   stable purchasing pattern with online merchants(4) and stable credit card behavior(3)

D

   mostly stable purchasing pattern with online merchants(4) and mostly stable credit card behavior(3) OR salaried worker with a credit card within certain preferred industry categories that we believe to be more creditworthy, which include, for instance, commercial banks

 

(1) “healthy purchasing pattern” means a purchase pattern with online merchants which includes, among others, an online purchasing history of no shorter than four years.
(2) “healthy credit card behavior” means a credit card related behavioral pattern which includes, among others, consistent on-time payments and a relatively low level of average credit utilization.
(3) “stable credit card behavior” means a credit card related behavioral pattern which includes, among others, consistent on-time payments and a moderate level of average credit utilization.
(4) “stable purchasing pattern” means a purchase pattern with online merchants which includes, among others, an online purchasing history of no shorter than two years.

Among the four segments, Grade A represent the lowest risks associated with the borrowers, while Grade D represents the highest risks. The APRs that correspond to the four segments in our current pricing grid range from 16.9% to 39.5%, enabling us to appropriately price across a broad range of loans. The APRs charged to borrowers includes both a fixed interest rate and a transaction fee rate for the services we offer borrowers. The specific APRs for the different segments in our pricing grid are as follows:

 

Pricing Grade

   APR
A    16.9%
B    27.4%
C    33.5%
D    39.5%

We have facilitated loans falling under Grade A on our marketplace since our inception, and these loans represent the majority of the historical loans facilitated through our online consumer finance marketplace. As part of our efforts to introduce dynamic risk-based pricing, we started to facilitate Grade B and Grade D loans in the fourth quarter of 2014, and Grade C loans in the first quarter of 2015. In the future, we plan to spend more effort promoting loans with higher APRs, such as Grade D loans. Despite the introduction of new pricing grades, we continue to focus on prime borrowers and these new price grades enable us to further segment this group of borrowers and price the risks associated with them more effectively. In the fourth quarter of 2014, loans totaling RMB813.8 million (US$131.3 million), RMB303.1 million (US$48.9 million) and RMB4.3 million (US$0.7 million) were made to borrowers falling with the Grade A, B and D segments, respectively. In the first quarter of 2015, loans totaling RMB392.8 million (US$63.4 million), RMB33.6 million (US$5.4 million), RMB22.5 million (US$3.6 million) and RMB1,171.8 million (US$189.0 million) were made to borrowers falling with the Grade A, B, C and D segments, respectively.

 

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We allow prospective borrowers who initially fail to meet our borrower criteria to reapply for a loan after a certain period of time, typically six months, if they are able to demonstrate a verifiable improvement in the criteria that impact their Yirendai score. For prospective borrowers that we determine present a fraud risk, reapplications are never permitted.

Our Risk Management Committee, Risk Management Division and Credit Assessment Team

Organizationally, we have a risk management committee, comprised of our executive chairman, chief executive officer, chief financial officer and chief risk officer, that meets monthly to examine the credit, liquidity and operational risks on our platform.

We have an independent risk management division, responsible for loan performance analysis, credit model validation and credit decisioning performance. This division engages in various risk management activities, including reporting on performance trends, monitoring of loan concentrations and stability, performing economic stress tests on loans, randomly auditing loan decisions by our credit assessment team members and conducting peer benchmarking and external risk assessments.

Our credit assessment team consisted of 48 members as of March 31, 2015. Each application for standard loan product received through our platform is reviewed by one junior member and one senior member of our credit assessment team. Members of our credit assessment team analyze loan applications and also assist with fraud detection and borrower verification, leveraging skills learned through training and on-the-job experience to evaluate loans on the basis of direct communications with potential borrowers. For each loan application, a junior team member will make an initial recommendation which is then reviewed by a senior team member, who has the authority to veto the junior team member’s recommendation. In 2014 and the first quarter of 2015, 18.8% and 22.9% of all loan applications were approved, respectively.

Loan Servicing and Collections

Our technology platform is capable of monitoring and tracking payment activity. With built-in payment tracking functionality and automated missed payment notifications, the platform allows us to monitor the performance of outstanding loans on a real-time basis.

We have developed a strategy to optimize the collections process for delinquent loans. Upon becoming one day delinquent, a loan enters our collections process. Our collections process is divided into distinct stages based on the severity of delinquency, which dictates the level of collection steps taken. Loans progress through the collection cycle based upon the number of days past due but can be accelerated based on specific circumstances. We outsource all stages of the collections process to CreditEase.

Credit Enhancement

Prior to August 2013, we offered investors a credit enhancement service in the form of a risk reserve fund, whereby we paid the loan principal and accrued interest to investors in the event that their loans defaulted. We charged investors a risk reserve management fee at a rate of 10% of the loan interest for this service.

In August 2013, we replaced the previous risk reserve fund with a guarantee system. Under this system, we worked with Tian Da Xin An, a guarantee company, to provide investors with the option of purchasing the assurance that their principal and interest would be repaid in the event that their loans defaulted, and the guarantee company charged investors 10% of the loan interest for the guarantee service. Historically, more than 99% of investors opted into the guarantee system. When we switched our credit enhancement service to the guarantee model described below in August 2013, we paid Tian Da Xin An a one-time fee of US$0.3 million for its assumption of the outstanding loan balances covered under our previous credit enhancement service model.

 

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Starting in January 2015, we ended our relationship with the guarantee company, which will still continue to guarantee all previously guaranteed loans, and launched our new credit enhancement service in the form of a risk reserve fund. This new risk reserve fund model is more sophisticated and disciplined than the old model we used prior to August 2013. Under the current arrangement, we collect from borrowers an amount equivalent to a certain percentage, currently at 6%, of all loans facilitated through our marketplace and set aside such amount in an interest-bearing custody account managed by China Guangfa Bank. The actual amount to be set aside is continuously monitored and calculated based on an analysis of both our historical charge-off rates and a charge-off forecast for our target borrower group. This risk reserve fund covers loans originated after January 1, 2015. If a borrower is 15 days delinquent in repaying an installment of principal and interest of a loan, we will withdraw an amount from the custody account to repay the delinquent installment of principal and interest to the corresponding investor. If a borrower is 90 days delinquent in repaying an installment of principal and interest on a loan, we will withdraw an amount from the custody account to repay the delinquent installment principal and interest, plus all the outstanding balance of the loan principal, to the corresponding investor. If the risk reserve fund becomes insufficient to pay back all the investors with delinquent loans, these investors will be repaid on a pro rata basis, and their outstanding unpaid balances will be deferred to the next time the risk reserve fund is replenished, at which time a distribution will again be made to all investors with delinquent loans. Once we make