The rumor mill has been in absolute overdrive over the fate of what was, until a little over three weeks ago, one of China’s top three Internet video sharing sites, 56.com, which is backed by heavyweight venture capital shops like Sequoia and Steamboat and by PE firms SIG China, CID, and Hikari. As has been widely reported, visitors to 56.com are greeted with what amounts to an “out of order” sign pleading technical problems that no one really believes to be true. The assumption has been that 56.com landed in hot water with regulators, and specifically with the State Administration of Radio, Film, and Television (SARFT), over unacceptable content.

Today, word on the street is that things may be far more serious for the embattled company than previously believed — that SARFT is playing hardball and has no intention of letting 56.com come back. Is this the end of the line for 56?

Before I go on, a few very important caveats are in order: What appears below, except as otherwise noted, is hearsay and rumor. I’ve made a round of calls — to Jay Chang, president and CFO of 56, who understandably has not returned my calls, as well as to some of 56.com’s investors (Sequoia, Steamboat), who have all politely declined any comment on or off the record. If I were writing as a journalist for a newspaper or a magazine, little of what I have would make the cut, and I simply wouldn’t print anything because I simply don’t “have it cold.” Anyone who quotes this blog should do so under the full knowledge that this is all still rumor, and as such all of this must be taken with a grain of salt.

That said, here’s what I’m hearing: One or more partners with Sequoia, one traditionally reliable Beijing-based source informs me, paid a visit to SARFT regulators to plead the case for 56 in an episode reminiscent of a visit IDG’s Hugo Xiong paid to same to prevent disaster from befalling his portfolio company, Tudou. Unlike Xiong’s SARFT audience, this source tells me, this one didn’t go well: when the Sequoia partner or partners asked for a dispensation, SARFT’s response was a chilly “Why should we?” Sequoia was told that the company had been given multiple content-related warnings, but that the problems had gone unaddressed. The upshot is that the ban is not going to be lifted. I put in a call to a friend of mine, a partner at Sequoia, but as I said, he has declined to comment. (Note that the source cited in the above is at a level of removal from events, though he’s very knowledgeable about goings-on in the world of venture-backed start-ups in China).

My source also tells me that Tudou.com managed to assuage SARFT’s anger in part by shuttering its services proactively for a 24-hour period in March — voluntarily, and not, as most people including me had previously believed, at SARFT’s insistence. “Founders and investors saw trouble coming and pre-emptively shut down to clean things up, and that cooled SARFT down,” he says. Because 56.com made no such efforts, they were made an example of — “Killing the chicken to scare the monkey” is the Chinese idiom being bandied about, though given 56’s competitive position prior to June 3,  it’s more like “killing a monkey to scare the other monkeys.”

Another source, a high-level video industry insider, tells me that he hears 56.com service may yet be restored in July, though he stresses that the damage in that case will already have been substantial and possible lethal. “Even if they come back, this is really going to hammer them,” he says.  56.com users have fled to the company’s main rivals, Tudou and Youku, both of whom have seen a palpable surge, and both of whom are still optimistic about receiving Internet video licenses from SARFT.

While some of the chatter I’m hearing says the board has already convened in emergency session, with one version claiming that a decision has already been taken to hand back remaining cash to the company’s most recent investors, a source of mine says that the emergency board meeting is actually set for tomorrow (Friday, June 27) and that no decisions have been reached — whether to liquidate assets, to acquire a licensed video sharing company (some 247 licenses have already been issued, but none of the Big 3 have been given licenses), or to make a last-ditch appeal to SARFT. Investors I contacted would not comment even on whether the board will convene or has already convened, let alone on what decision it has made or may yet make.

It’s difficult to estimate the cash that 56.com may still have on its balance sheets, but one source puts it at “about $10 million.” He adds that the company has non-video assets like its content delivery network (CDN) — a network of servers where content is cached. 56.com also has its slideshow widget.

For the sake of the company, its management team (some of whom I know, and regard as friends), its investors (again, for reasons of personal friendship above all else) and of course its employees, I sincerely hope that 56.com finds a way forward. I have no doubt that they’ve been adequately chastened by this experience, and will tighten up their internal content monitoring systems accordingly.