The "Front Store and Back Factory" Model of Web3 Entrepreneurship: Compliance Analysis and Recommendations

In recent years, a business model known as "front shop, back factory" has quietly emerged between Hong Kong and Shenzhen. This model usually refers to setting up projects or companies in Hong Kong targeting overseas markets and capital, while organizing technology development and part of the operational processes in Shenzhen, in order to enjoy strong technological R&D capabilities and relatively low costs. However, the compliance of this model has always been a focal point of concern in the industry.

The Reason for the Existence of the "Front Store and Back Factory" Model

The existence of this model is mainly because regulatory agencies not only focus on whether the project directly serves domestic users, but also examine the actual operations, core decision-making, and the location of fund management of the project. On the surface, many Web3 projects register all legal entities and businesses in Hong Kong or other overseas jurisdictions, using technical means to restrict their services to users in Hong Kong and abroad, while also arranging for fund settlement, license applications, and market promotion to be completed overseas.

The decision to establish a technical team in Shenzhen is primarily based on considerations of cost, efficiency, and technological advantages. As an important part of the Guangdong-Hong Kong-Macao Greater Bay Area, Shenzhen has a mature technology research and development foundation and a rich reserve of Web3 talent. For many Web3 projects, outsourcing underlying research and development to Shenzhen is a reasonable business choice, similar to the model of "overseas company + domestic outsourcing" in the traditional internet industry.

Potential Challenges Faced by the "Front Store and Back Factory" Model

Although this model appears to circumvent regulatory risks by clearly delineating the operational functions of domestic and overseas operations, there is still a high level of Compliance sensitivity. The technical development, product iteration, and business operations of Web3 projects are highly coupled, and domestic technical teams may not only be responsible for development work but may also be involved in token design, certain operations, data processing, and even user support, which poses potential risks to the project's Compliance.

Regulatory agencies will not only look at whether the surface structure is compliant but will also conduct an in-depth analysis of the actual control chain of the project, including the holders of core operational rights, decision-making rights regarding the flow of funds, and user data management rights. If the daily operational management, key decision-making, and fund handling of the project are still concentrated domestically, even if the project entity is registered in Hong Kong and the target clients are limited to overseas users, it may still be deemed as providing illegal financial services in disguise.

In addition, some projects outsource part of their marketing, community management, and even customer service to teams in Shenzhen to save costs or improve efficiency. This may be viewed by regulatory authorities as a failure to clearly delineate the core operational chain, potentially evading legal requirements.

Suggestions for Reducing Legal Risks

To truly reduce legal risks, Web3 startup teams should pay attention to the following points when adopting the "front store and back factory" model:

1. Completely cut off the core control chain inside and outside the country. Ensure that core aspects such as daily decision-making, fund circulation, and user data processing of the project are independently completed by overseas registered entities, avoiding outsourcing relevant functions back to domestic teams.

2. Avoid the mixing of technology research and development with product operation functions. Clearly define the scope of work for the technical team, and strictly separate it from the compliance team and operation team of the Hong Kong entity, ensuring that technology development only exists as a "back-end".

3. Establish a clear legal and Compliance firewall. With the assistance of professional legal personnel, establish a clear isolation mechanism with the domestic team in the areas of contracts, personnel structure, and the flow of funds.

4. Prepare compliance filings in advance for each jurisdiction. If the project entity is registered in Hong Kong, it is recommended to apply for the relevant licenses as early as possible to ensure that all financial services offered to users operate within the compliance framework. At the same time, avoid engaging in any promotional marketing, community operations, payment settlement, and other activities in mainland China.

Although the "front shop and back factory" model can still be an option at present, the premise is that the team must truly achieve a clear separation of domestic and overseas resources and responsibilities. However, under the current regulatory environment, this model is not the best long-term solution. As regulations become increasingly strict, the risks will also rise accordingly.

Therefore, it is recommended that Chinese entrepreneurs consider truly implementing the "going global" model, integrating technology research and development, corporate governance, and financial operations overseas, and accepting the compliance management of foreign regulatory agencies to ensure long-term stable development.