Compliant Low-Cost RWA: Beware of Illegal Fundraising Risks
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Compliant Low-Cost RWA: Beware of Illegal Fundraising Risks
RWA is not immune to legal risks simply by having asset backing.
Navigating Web3 tides with focused insightsArticle by: Liu Honglin
With East and West currently unwilling to support each other, the entire cryptocurrency market at this stage seems to have only one concept capable of achieving broad consensus—RWA (Real World Assets, or tokenization of real-world assets).
A Low-End, High-Risk Version of "RWA"
For various reasons, many Web3 entrepreneurs are eyeing opportunities to tokenize physical assets via blockchain technology—issuing tokens or NFTs to raise funds—especially those who hold offline assets such as real estate or artwork. But clearly, things are rarely as simple as they seem. Recently, the criminal law team at Manqin Law Firm handled a criminal case involving an RWA project, in which Attorney Liu Honglin was deeply involved. Looking back, I believe this case is highly representative.
To protect the privacy of the parties involved, Attorney Honglin has fictionalized and blurred certain details of the case for discussion purposes only—please do not take it as factual. Through this example, let's discuss the legal risks that arise when RWA projects fail to manage compliance properly, so entrepreneurs can learn how to avoid these pitfalls.
The story goes like this: An entrepreneur wanted to use the RWA model to revitalize a real estate project. The plan was to anchor future revenues from the property, issue NFTs via blockchain technology, and sell them directly online to individual investors. After purchasing these NFTs, investors would receive a share of the property’s earnings. Initially, marketing efforts were strong, and with real estate returns appearing secure, many users saw this as a “risk-free profit” opportunity, leading to solid short-term sales. But alas, no flower blooms for 100 days. As the local economy continued to decline, operating income from the property fell far below expectations. Even after company executives began using their own money to cover payouts, the project ultimately collapsed. Early participants, especially those who bought at inflated prices on secondary markets, became dissatisfied and organized collective complaints and legal actions. Eventually, the project was criminally investigated by public security authorities in one region.
This story illustrates a simple truth: even if you have real-world physical assets like real estate as collateral, and even if you’ve made no false claims or concealed facts, that does not make you immune to legal risk.
Real-World Asset Backing ≠ Legal Immunity
In today’s climate, where “using virtual means to promote real economy” is encouraged by many local governments, some entrepreneurs believe that as long as their issued NFTs are backed by real-world assets, they’re safe. However, while asset backing may increase credibility, it cannot replace sound operational capabilities—and certainly doesn’t eliminate operational risks.
From our practical experience, many so-called RWA projects run into trouble because project teams focus solely on leveraging asset backing to issue tokens, while neglecting sustainable operations. When market conditions underperform and promised returns cannot be delivered, the consequences range from accusations of false advertising to, in severe cases, criminal liability.
As a Web3 business compliance lawyer, Honglin understands that many entrepreneurs start with good intentions—not aiming to scam and flee. Yet, risk-taking founders often overestimate future returns and overlook market uncertainty. Once the market turns or operational challenges emerge, projected returns fail to materialize, and legal issues quickly follow.
How to Avoid Legal Pitfalls in RWA Projects
Globally, the RWA concept is still in its exploratory phase, with varying legal definitions and regulatory approaches across jurisdictions. Many entrepreneurs see successful overseas RWA projects and rush to replicate similar models domestically, often overlooking China’s unique legal environment. Mainland China maintains strict regulations on cryptocurrency; crypto trading, fundraising, and related activities remain high-risk zones. Many projects initially focus only on the fast fundraising potential of token issuance, ignoring underlying regulatory requirements. Once they cross red lines related to virtual currencies, consequences may extend beyond user complaints or civil lawsuits to include criminal penalties.
For Web3 entrepreneurs aiming to succeed in the RWA space, Attorney Honglin offers three practical recommendations to avoid landmines.
1. Don’t adopt a “hit-and-run” mindset
RWA projects are not quick fundraising channels. Many entrepreneurs chase short-term gains, hoping to launch a token and raise funds rapidly. This “hit-and-run” mentality is extremely dangerous—especially in unstable markets. If a project fails to deliver promised returns, investors quickly turn to complaints and police reports. Remember, entrepreneurship is a marathon, not a sprint. Plan for long-term operation instead of expecting to cash out through one quick move.
2. Keep investor funds strictly separated
Don’t misuse investor money. Many projects, after early fundraising, casually divert investor funds to other development initiatives—or even speculate in cryptocurrency markets. Such behavior not only easily triggers investor dissatisfaction but also raises red flags for law enforcement, potentially being classified as illegal fundraising or fraud. Ensure clear separation between project funds and general corporate operating capital, and maintain full transparency in fund usage. This is the most basic principle of financial management.
3. Operational execution matters more than technical concepts
Whether it’s blockchain, RWA, or NFTs, entrepreneurs must remember: no matter how impressive the technology, what ultimately counts is operations. Investors care whether you can generate consistent returns; customers care whether you can deliver stable products and services—not how cutting-edge your tech is. If your business logic is unclear and your operational capacity lags, your project will likely fail regardless of technological sophistication. Focus on solid, real-world operations. Don’t be blinded by buzzwords—this is the key to long-term survival.
Manqin Law Firm Summary
RWA projects may appear to offer Web3 entrepreneurs a new path forward, but at this stage, the model remains immature. While navigating uncharted waters, RWA is far from legally risk-free just because it involves asset backing. In mainland China, any activity involving tokenized asset fundraising demands extreme caution. If you're uncertain about the criminal risks associated with your Web3 project, we strongly recommend consulting an experienced lawyer for guidance and review.
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