On August 21, 2014, China Securities Regulatory Commission (CSRC), the Chinese securities regulator, promulgated the Interim Regulations on the Supervision and Administration of Private Investment Funds (the CSRC Regulations). These new regulations became effective on the same date.
Wide definition of private investment funds
The CSRC Regulations adopt a very broad definition of private investment funds, covering all types of funds raising money by private placement within China. Assets under management of such funds include stocks, equity interest, bonds, futures, options, mutual fund units, or any other investment portfolios as stipulated by the relevant investment agreements. Such funds can also be structured in different corporate forms, such as companies, partnerships, subsidiaries of securities houses, asset management companies and futures companies, etc. This definition looks general enough to cover both private equity funds and hedge funds businesses. A separate chapter in the CSRC Regulations further provides for certain differentiated treatments (subject to CSRC’s discretion) to venture capitalists.
Post-formation filings
Generally, the CSRC Regulations require each fund manager of an investment fund to conduct filings with the Asset Management Association of China (AMAC), the national self-regulatory organisation under the supervision and authorisation of CSRC, at the following stages:
- Upon formation of the fund manager, it shall carry out an initial filing with AMAC of its incorporation-related information including its articles of association or partnership agreement, a list of major shareholders/partners, basic information of its senior management, etc.;
- After the proposed fund successfully raises money from investors, the fund manager shall further provide AMAC with information relating to the fund’s major investment directions, its prospectus/offering memorandum, custody agreement, investment management agreement (if any), etc.; and
- When the fund manager is wound-up, de-registered or bankrupt, its legal representative or general partner shall report to AMAC, and AMAC will cancel its filing status and make corresponding public announcements.
Such filings will however not constitute any endorsement or acknowledgement of the relevant fund manager’s investment capacity, continuing compliance with laws, or the security of assets under management.
Qualified investors
The CSRC Regulations specify detailed and quantified criteria of investors who are qualified to subscribe to such investment funds - a ‘qualified investor’ must invest at least RMB 1 million as capital commitment in one fund, and,
- if being an institutional investor, it has a net asset of at least RMB 10 million; or
- if being an individual investor, his/her own financial assets (including bank deposit, stocks, bonds, mutual fund units, assets management plans, bank financial products, trust schemes, insurances, futures options, etc.) must be at least RMB 3 million, or his/her annual income during the preceding three years must be at least RMB 500,000.
The CSRC Regulations list certain institutions to be ‘qualified investors’, including social/public interest-related funds such as pension funds, annuity funds, charity funds, the investment schemes already registered with AMAC, fund managers and their employees who co-invest into the relevant funds under their management, etc. The CSRC Regulations further reiterate that the number of qualified investors in a fund must not exceed the statutory maximum number of shareholders/partners of the relevant corporate form under Chinese law. To be specific, a fund will then have:
- no more than 50 shareholders if it is a limited liability company;
- no more than 200 shareholders if it is a company limited by shares; or
- no more than 50 partners if it is a limited partnership.
Generally, a ‘look-through’ doctrine should be applied to determine the status and number of ‘qualified investors’ if any potential investor is a partnership, contract, or in other non-legal-person form.
Other requirements
The CSRC Regulations prohibit any fund from (i) raising money from institutions or individuals unless they are qualified investors, or (ii) promoting the fund to the public by means of newspapers, radio, television, internet and other public media networks, or via seminars, colloquiums, posters, text messages, webchat, blogs, emails, etc. A fund manager ought to prepare a detailed questionnaire for each potential investor to fill in, and then assess the potential investor’s applicableness. The fund manager, custodian or broker must further keep all files of the fund, including those relating to its investment decisions, transactions and investors’ status, etc., for at least 10 years after the fund’s dissolution.
Uncertainties
Since years ago, PE/VC funds in China have been required to register themselves and comply with certain guidelines issued by another Chinese governmental regulator - the National Development and Reform Commission (NDRC). In 2013, the Standing Committee of the Chinese National People’s Congress promulgated the Securities Investment Fund Law, for the first time clarifying that CSRC (and its delegate AMAC) instead of NDRC is the regulator of private equity and venture capital funds. However, in practice, it appears that until now NDRC’s registration requirement still applies, especially for (1) those private equity funds that propose to attract capital commitments from NDRC-regulated governmental funds of funds, and (2) certain venture capital funds. This practical discrepancy should be noted when forming private equity/venture capital businesses in China.
Louis Meng, based in the Shanghai office, is a partner in the Mergers and Acquisition Practice Group and co-head of the Asia Practice Group. Meng leverages more than 20 years of Greater China experience to serve clients in both inbound and outbound work.
James Zhang, based in the Shanghai office, is an associate in the Mergers and Acquisitions Practice Group, where he concentrates on a wide range of real estate and M&A matters and offers substantial knowledge and experiences on various regulated industries in China.
Miles Pan, based in the Shanghai office, is a legal consultant in the Mergers and Acquisitions Practice Group, where he provides a comprehensive range of legal services to both domestic and international clients.
Haynes and Boone, LLP is an international corporate law firm with offices in Texas, New York, California, Washington, D.C., Shanghai and Mexico City, providing a full spectrum of legal services. With more than 500 attorneys, Haynes and Boone is ranked among the largest law firms in the nation by The National Law Journal and has been repeatedly recognized as an AmLaw 100 firm by the American Lawyer. The firm has also been named winner of a 2013 Thomas L. Sager Diversity Award by the Minority Corporate Counsel Association. For more information, please visit www.haynesboone.com.
