Lawful Unfairness and Unlawful Deception — The Dividing Line Between Two Kinds of "Fraud" in the Lofter Group Case

This is the third article in the Lofter Group case analysis series. For background and the food-chain structural analysis, see the first article: "Layer Eats Layer — The Food Chain Structure of the Lofter Group Case."

I. Why Do People Feel This Is Fraud?

After the Lofter Group incident, "fraud" was the most common label applied by the public. But if you took that word to a lawyer, they would likely shake their head — the PE financing contract was legal, the PG was voluntarily signed, the properties were real, and the project genuinely had a chance of making money. From a legal standpoint, this was not fraud.

But the victims' intuition is not groundless either. They felt they were "deceived," and this feeling stems from a real problem: within this affair, two entirely different types of "fraud" coexist, blended together, making them hard to distinguish.

The first type is lawful suppression within a legal framework. The second type is information asymmetry that may involve regulatory violations.

They look very similar, but their nature, legality, and the possibility of legal recourse are entirely different.

II. The First Type: PE's "Lawful Fraud"

PE funds' operations against borrowers — contract weaponisation, PG binding, Joint and Several Liability — belong to the first type.

Are these operations immoral? Depends on your standards. Are they unfair? Without question. But are they legal? Under the current legal framework, yes.

Every clause in PE's contracts has been refined repeatedly by top-tier legal teams to ensure they hold up in any jurisdiction. PG was signed with mutual consent. Interest rates were stated in the contract. Trigger conditions were stated in the contract. Default consequences were stated in the contract. You can argue that the borrower "didn't understand" the full implications of these clauses, but legally, once you signed, you are deemed to have agreed.

This is what is known as "lawful unfairness." PE crushes you under its weight, but it does so within the framework of contractual freedom. The law protects the validity of contracts, not the equality of bargaining positions. You can condemn PE's practices on moral grounds, but it is very difficult to pursue them legally.

If a traditional loan shark charges interest exceeding the statutory ceiling, you can report them to the police. But PE's rates, however high, are legal as long as they are written in the contract and do not exceed statutory limits. The tool has changed from violence to contracts, but the logic is the same.

In fact, if you look at it from PE's perspective, requiring PG is an entirely reasonable risk-control measure.

Lofter Group's "asset-light" model meant: the borrower's project company itself had virtually no assets. The group's equity contribution might be only 3% or even zero; before properties were completed and sold, there was nothing of value on the company's balance sheet to pledge. And Lofter's 8 projects had a total investment approaching HK$10 billion — meaning the scale of PE's capital deployment was enormous.

Ask any financial institution to lend billions to a company with near-zero net assets without requiring additional guarantees, and that would be unreasonable. Any bank, any financial company, faced with this kind of balance sheet, would demand similar protections. PE requiring PG was not a "dirty trick" — it was a normal response to a high-risk borrower.

So the core question was never "why did PE require PG." The question was: who bears this PG?

In traditional PE financing, PG signatories are the enterprise's actual controllers — decision-makers, major shareholders, those in charge. They have control over the company's operations, and bearing PG is in some sense commensurate with their power. But in Lofter's model, those who bore PG were not Janice Chow herself (she did not even appear on some project companies' shareholder and director lists), but the retail investors who held shares on a "one share, one vote" basis and had virtually no control over the projects' actual operations.

PE wanted guarantees; it may not have cared who provided them. Lofter chose to fill that position with retail investors. This is the critical inflection point where the whole affair slides from "lawful unfairness" toward the second type of "fraud."

III. The Control Group: How Standard Startup Financing Works

To understand how distorted the Lofter/PE model was, the best approach is to see how standard startup financing operates.

In the tech startup world, angel rounds, Series A, and Series B financing see investors contributing money in exchange for equity in the company — not an IOU. This is a fundamental distinction.

Win, and everyone wins together — investors' shares multiply by tens of times when the company goes public or is acquired. Lose, and everyone loses together — the company folds, shares become worthless, and the money investors put in is effectively thrown into the sea. The founder does not need to repay investors in cash. This is the essence of high-risk, high-return venture capital: shared risk.

More importantly: in standard venture capital or angel investing, investors absolutely never require the founder to sign a Personal Guarantee (PG). Because startups typically operate as limited companies, meaning the company and the founder are legally separate entities. If the company goes bankrupt, liquidation covers the company's assets — it does not touch the founder's personal property, savings, or private assets. If an investor demanded that a founder sign PG — meaning business failure requires selling personal assets to repay — insiders would call this a "poison pill clause," and no normal startup team would accept it.

Of course, startup financing has exceptions. Convertible notes or SAFEs are common in very early-stage financing, but they are designed to automatically convert to equity in the next round and typically do not devolve into debt collection. Some investors (particularly traditional VCs in certain regions) include "ratchet clauses" or "buyback provisions," stipulating that if the company fails to IPO within a specified period, the founder must buy back shares. But in the mainstream tech startup world, excessively harsh personal buyback clauses are relatively rare.

And the situations in which a founder truly faces personal liability are usually limited to: fraud and falsified accounts (criminal offence), borrowing from banks in the company's name with a personal guarantee (banks play by entirely different rules from VCs), or signing predatory buyback clauses.

Now place this control group back in the context of the Lofter case.

Lofter's investors thought what they were doing was very close to "equity investment" — contributing money, buying shares, one share one vote, sharing profits if they win. But the moment they signed PG, the nature of the whole thing shifted from "equity investment" to "personally guaranteed lending." They adopted an "investment" mindset while assuming the legal liability of a "loan guarantor."

In standard startup financing, investors bear risk, but that risk has a ceiling — at most they lose their invested principal. In Lofter's model, PG-signing investors bore risk with no ceiling — Joint and Several Liability means they could be liable for the project company's entire debt, with interest continuing to accrue.

In standard startup financing, any VC that asked a founder (the actual controller of the enterprise) to sign PG would have their clause labelled a poison pill. But Lofter didn't just ask the founder to sign — it asked retail investors with no control over the company's operations to sign too.

This comparison reveals the most essential problem of Lofter's model: it used the language and packaging of "investment" to make investors believe they were participating in a risk-sharing commercial venture. But the existence of PG changed the legal nature of the entire thing from "investment" to "guarantee" — and most investors, at the time of signing, did not understand what this transformation meant.

IV. The Second Type: Lofter's Information Asymmetry Toward Investors

The second type of "fraud" is entirely different in nature.

In an official clarification statement published by Lofter Group in 2021, the company explicitly stated: "Project stakeholders have the sole and absolute right to make day-to-day decisions and manage the project company. All day-to-day operational decisions are made by stakeholder vote in accordance with the Articles of Association." It further stated: "All funds are deposited directly into the project company's bank account and managed by the stakeholders themselves."

But the picture painted by victims and media reporting diverges markedly from this statement.

Shareholders complained to the media about being treated as "ATM machines" and asked to inject additional capital proportionally. Shareholders in some projects questioned management efficiency; some even expressed intent to vote for the project company's liquidation — if shareholders truly had "sole and absolute decision-making and management rights," why was their liquidation intent not acted upon? Janice Chow herself did not appear on some project companies' shareholder and director lists, yet the group she founded was effectively managing those projects — under this structure, what did "stakeholders manage themselves" actually mean in practice?

The more critical question is: were investors adequately informed of the following when they entered?

First, the project company's actual financial position — including real debt levels, detailed PE contract terms, and the rate of interest accumulation.

Second, the possibility that they might later be asked to sign PG, and PG's actual legal consequences under Joint and Several Liability.

Third, Lofter Group's actual role and power within the project — nominally a "service provider," but in reality how much control did it have over the project's direction?

If investors made their investment decision and signed PG fully aware of all of the above, then this was indeed a "you bet, you lose" lawful gamble. But if the information they relied on to make their investment decision and sign PG was incomplete, embellished, or materially different from the actual situation — then this is no longer "lawful unfairness" but a potential legal issue involving misrepresentation or failure to disclose.

The dividing line between the two types of "fraud" lies precisely here.

V. Why the Two Are Easily Confused

The two types of "fraud" are easily conflated because their effects are highly similar — investors all feel "deceived," all suffer heavy losses, and all face the bottomless debt-collection pit of PG.

But the causes are entirely different.

Damage caused by PE contracts stems from the inherently unfair design of the contractual terms. Even if investors had understood every single clause 100%, as long as the market turned, they would still face the same outcome. This damage is a product of contractual structure and is extremely difficult to pursue legally.

But if the information investors relied on to make their decisions was flawed — told "13% returns" without being adequately informed of risks, guided into buying equity without knowing PG would later be required, told "one share, one vote" but actually having no control over the company's operations — this damage stems from information asymmetry and potentially touches upon company law, securities law, or even the common-law doctrines of misrepresentation or negligent misstatement.

A simple analogy: PE contracts are like a lawful gamble with massively tilted odds — you might lose terribly, but you knew what you were betting on. But if someone told you this was a "sure-win" investment, concealed the true odds of the gamble, or even pushed you onto the gambling table without your knowledge — that is not just "an unfair gamble" but "cheating."

The former is very hard to litigate. The latter has legal standing.

VI. The Grey Zone of Mentor Referrals

Within this framework, the role of investment mentors deserves even closer scrutiny.

If mentors merely taught general property investment knowledge, collected course fees, and then students independently decided whether to invest in specific projects — this is normal commercial activity involving no violations.

But if mentors directly promoted specific projects in their courses, cited specific return rates as selling points, channelled students toward specific investment vehicles, and themselves collected referral commissions or benefits — while students were not fully aware of the interest relationship between the mentor and the project party — then this enters a grey zone.

Because in this scenario, students believed they were receiving "independent investment education," when in fact they were being steered toward a specific investment decision. The mentor's "independence" was superficial; their income structure naturally inclined them to promote investor entry.

This is entirely consistent with the "fee structure determines freedom of speech" analysis from the second article — the mentor's fee structure dictated that they could not genuinely stand in the student's interest to assess risk.

But the deeper question is: does this kind of referral activity legally constitute "investment advice"? If it does, does the mentor need to hold the relevant licence? If it does not, how should legal liability be apportioned when a student's investment decision, made based on a mentor's referral, goes wrong?

These questions currently have no clear legal answers. But they are precisely the critical terrain that distinguishes "lawful unfairness" from "unlawful deception."

VII. What Everyone in Business Must Know

The lessons of the Lofter case extend far beyond "property investment." Anyone running a business, co-founding a venture, or considering accepting financing should understand the following baseline principles.

First, distinguish "investment" from "lending." Someone puts money into your company's equity — win together, lose together — that is investment. Someone lends money to your company, and regardless of profit or loss you must repay principal plus interest — that is lending. The legal consequences are entirely different. If someone uses the language of "investment" to package what is substantively a "lending" transaction, you need to be especially careful.

Second, never sign a Personal Guarantee lightly. Once PG is signed, your personal assets are bound to the company's debt. The limited-company firewall — your greatest legal protection — is pierced. In the standard startup financing world, a VC requesting a founder to sign PG would be labelled a poison-pill clause. If anyone asks you to sign PG, you must first independently consult a lawyer, fully understand the complete consequences of Joint and Several Liability, and only then make your decision.

Third, when co-investing in a business, the books must be transparent. If you partner with someone but they won't let you see the accounts, won't give you audit rights, and nominally call it "one share, one vote" but in reality you have no control over operations — this is not a partnership. This is lending your name and assets for someone else to use. You bear the responsibilities of a shareholder or even a guarantor, while enjoying only the rights of a bystander.

Fourth, high returns necessarily entail high risk — but what you need to know is the specific shape of that risk. When someone tells you the return rate is 13%, the question to ask is not "is it possible," but "if it doesn't materialise, what specifically will I lose, how much, and for how long?" If the other party cannot or will not answer this question, you have just received the most important answer of all.

VIII. Conclusion: Same Affair, Two Lines

Returning to the original question: was the Lofter incident fraud or a gamble?

The answer is: within the same affair, two lines exist simultaneously.

PE contract terms' suppression is lawful unfairness. Damage along this line stems from the contractual structure itself and is extremely difficult to pursue legally. Victims can condemn PE's predation on moral grounds but will have great difficulty winning in court.

Whether Lofter (and possibly the referrers) met the legal standard for information disclosure to investors — that is the other line. If the information investors relied on to make their decisions contained material omissions or falsehoods, damage along this line stems from information asymmetry and has legal room for pursuit.

The common ground of both lines is: investors lost. The distinction between them is: one is protected by the principle of contractual freedom; the other may cross the legal baseline of misrepresentation or investor protection.

And the reason most public discourse has been confused is precisely the failure to separate these two lines. Conflating PE's lawful suppression with Lofter's information asymmetry leads to one of two outcomes: either everyone is labelled a "fraudster" — which doesn't hold up legally — or everyone is treated as a "lawful gambler" — which is far too lenient on potential regulatory violations.

The truth, as ever, lies somewhere between the two extremes.

This article is not legal advice. Any investor who believes they were affected by misrepresentation or failure to disclose during the investment process should seek independent professional legal counsel to clarify whether their specific situation falls on one line or the other.