Since February 7, 2014, the Asset Management Association of China (“AMAC”) has officially undertaken the functions of registration of private equity (“PE”) fund managers, filing of PE funds and industrial self-discipline management. In order to address certain issues and risks exposed during the past two years (for example, abuse of the registration or filing information for credit enhancement, lack of compliance awareness and failure to perform the on-going information reporting obligations by certain fund managers), since the beginning of 2016, AMAC has issued a series of industrial self-discipline rules, including the Guidelines for Internal Control of Private Equity Investment Fund Managers (“Internal Control Guidelines”), Administrative Measures on Information Disclosure by Private Equity Investment Funds (“Disclosure Measures”), Circular on Several Issues concerning the Further Supervision over Registration of Private Equity Fund Managers (“Circular No.4”) and Administrative Measures on Fund-raising Activities of Private Equity Investment Funds (“Fund-raising Measures”). The foregoing rules are designed to rectify the existing irregularities and set out clear standards for operation activities in the PE industry so as to protect the interests of investors and sustain stableness of the PE market. With a focus on Circular No.4 while also taking other related laws, regulations and self-discipline rules into consideration, this article aims to provide a preliminary legal analysis of and certain suggestions on the compliance requirements applicable to institutions engaged in PE fund management (“Fund Management Institutions”). A. Fund Management Institutions shall apply with AMAC for registration and for filing of their fund products in a timely manner Fund Management Institutions shall apply with AMAC for registration as PE fund manager and shall file their PE fund products with AMAC within 20 working days upon completion of fund-raising for a particular fund product. Fund Management Institutions which fail to complete the said registration or filing would face adverse legal consequences (including orders for rectification, warnings and fines) and will be unable to participate in capital market activities in China. Specifically, where PE funds invest in the following projects, China Securities Regulatory Commission (“CSRC”) and National Equities Exchange and Quotations (“NEEQ”) require professional agencies such as sponsors and lawyers to examine and opine on whether the PE funds involved have gone through the fund filing procedure in accordance with relevant regulations: 1. Pre-IPO investments (by way of new subscription or acquisition of existing equity interests) in proposed listing companies or private placement of listed companies; 2 2. Mergers and reorganizations of listed companies (including asset acquisition by way of issuance of shares, merger, split and ancillary financing by listed companies); and 3. Application for listing, issuance of stock, major assets reorganization and the like at the NEEQ system by listed companies or proposed listing companies, in which PE fund managers or PE funds are involved as shareholders, potential stock subscribers or counterparties (i.e. the NEEQ market activities). Given that registration of the PE fund manager is a precondition for the filing of PE funds, a PE fund will not be able to participate in the aforementioned domestic capital market activities if its manager has not been duly registered with AMAC. Therefore, we suggest that Fund Management Institutions conduct self-examination as soon as possible and go through the registration/filing procedures of PE fund managers/fund products with AMAC before participation in IPO, mergers and reorganizations of listed companies, NEEQ market activities or other domestic capital market activities. B. PE fund managers shall file its first fund product in a timely manner, failing which its registration will be cancelled Against the backdrop that many institutions have been registered as PE fund manager without genuine business essence and a number of registered fund managers have lost contact or have not had any business operation, which has seriously affected the authenticity and validity of the statistics of the PE industry, Circular No. 4 requires PE fund managers to carry out their business in a timely manner and file their first PE fund product within the specified grace period. In case of failure to comply with the above, their registration as PE fund manager will be cancelled. The grace period varies according to the registration date of PE fund managers, which is detailed below: 私募基金管理人登记日期 Registration Date of PE Fund Managers 备案期限 Grace Period 1. 4 号文公布后新登记的 （2016 年 2 月 5 日后） Registered after promulgation of Circular No.4 (after February 5, 2016) 办结登记手续之日起 6 个月内 Within 6 months after registration 2. 4 号文公布 前已登记 Registered on or 登记满 12 个月的 （2015 年 2 月 5 日及之前登记） Registered for at least 12 months 2016 年 5 月 1 日前 Before May 1, 2016 3 before promulgation of Circular No.4 (registered on or before February 5, 2015) 3. 登记不满 12 个月的 （2015 年 2 月 6 日及之后登记） Registered for less than 12 months (registered on or after February 6, 2015) 2016 年 8 月 1 日前 Before August 1, 2016 In addition, according to AMAC, filing for a Consulting Management Fund will not be deemed as filing of the first fund product, at least so for the time being. C. Circular No.4 has specified the legal consequences for violation of the information reporting obligations Pursuant to the Measures for the Registration of PE Fund Managers and Filing of Funds (For Trial Implementation) (the “Registration and Filing Measures”) and the Interim Regulations on Enterprise Information Disclosure, PE fund managers shall perform quarterly and annual information reporting obligations as well as reporting obligations regarding significant changes and annual financial statements. Circular No.4 further provides for the legal consequences for violation of the above obligations and has established the linkage mechanism with China’s Enterprise Credit Information Disclosure System (the “ECID System”), which is detailed below: 报送义务 Reporting Obligation 违反后果 Consequences for Violation 季度、年度和重大事项 变更 Quarterly/Annual Information Reporting and Reporting of Information re Significant changes - 整改前不受理基金备案申请 - will not be able to file any PE fund before rectification - 违反达 2 次的，列入异常机构名单予以公示 - will be included in the list of abnormal institutions and disclosed to the public for two violations 年度经审计财报 Annual Audited Financial Statement - 已登记的：整改前不受理基金备案申请，并直接列入异常机构 名单予以公示 - For registered managers: will not be able to file any PE fund before rectification; will be included in the list of abnormal institutions and disclosed to the public straight away - 成立满一年的机构新申请登记的，不予登记 - For institutions which apply for new registration and which have been established for more than 1 year: registration application will be rejected 4 企业信用信息公示系统 联动 Linkage to the ECID system 对被列入严重违法企业公示名单的机构： For institutions included in the list of enterprises with serious violations published at the ECID System: - 已登记的：整改前不受理基金备案申请，并直接列入异常机构 名单予以公示 - For registered managers: will not be able to file any PE fund before rectification; will be included in the list of abnormal institutions and disclosed to the public straight away - 新申请登记的，不予登记 - For institutions which apply for new registration: registration application will be rejected For institutions included in the list of abnormal institutions, the state of “abnormal” will not be changed to “normal” until 6 months after rectification. Therefore, we suggest that Fund Management Institutions conduct self-examination and take measures to ensure compliance with the aforementioned information reporting obligations. D. Requirements for submission of legal opinions Circular No. 4 provides that, as effective from the date of its promulgation, PE fund managers shall submit legal opinions rendered by law firms when applying for the fund manager registration, or before filing the first fund product, or upon receipt of request from AMAC, or after occurrence of certain significant changes, which requirement has attracted extensive attention. According to the Guidelines for Legal Opinion regarding Registration of PE Fund Managers (“Legal Opinion Guidelines”) attached to Circular No. 4, issues to be addressed in the legal opinion basically cover almost all aspects of PE fund managers, and lawyers are required to give conclusive opinions item by item without ambiguous expressions (such as “in compliance at large”). As a result, PE fund managers are effectively required to achieve full compliance, which it is widely believed to have changed the registration regime into an approval regime. According to public reports, AMAC is taking quite a strict stance on the review of legal opinions for PE fund manager registrations and the passing rate of submitted legal opinions is fairly low for the time being. Therefore, we suggest that Fund Management Institutions conduct self-examination and ensure compliance with various compliance requirements of AMAC before submitting 5 the legal opinion. Compliance requirements of AMAC, apart from those discussed in the sections below, include: 1. Proper name and business scope: AMAC requires that the name and business scope of PE fund managers shall include relevant wordings such as “Fund Management”, “Investment Management”, “Assets Management”, “Equity Investment”, “Venture Capital Investment” and so forth. However, currently, the Administration for Industry and Commerce in a number of localities has suspended registration of enterprises with the name or business scope with aforementioned wordings, which has greatly increased the difficulty for such compliance for the time being. 2. Due capital contribution: AMAC requires that fund managers shall have an appropriate level of capital. The public platform of AMAC gives special alerts if the paid-up capital of a fund manager is lower than 25% of its registered capital or lower than RMB 1 million. E. Fund practitioner qualifications for senior management personnel AMAC requires that senior management personnel of fund managers as well as other fund practitioners shall obtain PE fund practitioner qualifications. Circular No. 4 has further specified the scope of senior management personnel, clarified the conditions and requirements for obtaining and maintaining the fund practitioner qualifications and imposed requirements for rectification before Dec 31, 2016; if a PE fund manager fails to meet the said rectification requirement before the deadline, AMAC will suspend acceptance of its application for filing of fund products or for other significant changes. Meanwhile, the public platform of AMAC also gives special alerts of “Senior Management Personnel Lacking Fund Practitioner Qualifications”. Therefore, we suggest that Fund Management Institutions conduct self-examination, urge their senior management personnel to obtain fund practitioner qualifications as soon as possible as required by Circular No. 4, and submit the application for significant changes regarding fund practitioner qualifications before Dec 31, 2016. In addition, according to requirements of AMAC, fund managers shall not hire individual managers who have left public equity fund management companies for less than three months to engage in investment, research, transaction and other related activities. F. PE fund managers shall establish a sound risk management and internal control system The risk management and internal control system is a very important aspect of the legal opinion of fund managers. Such system should be established in accordance with the 6 Internal Control Guidelines issued by AMAC, which provide for self-discipline requirements in terms of internal environment, risk evaluation, control activities, information communication and internal supervision. The principle of “professionalized operation” provided in the Internal Control Guidelines is quite worth noting, which requires that PE fund managers shall have a very clear primary business and shall not concurrently engage in other businesses that are not related to or otherwise have a conflict of interests with the fund management business. According to AMAC, PE fund managers are not allowed to engage in private lending, private financing, margin trading, petty money management, petty credit, P2P/P2B, crowd funding, factoring, guarantee, real estate development, transaction platforms and other businesses which have a conflict of interests with the nature of PE funds. F. Regulations on fund-raising activities AMAC published the Fund-raising Measures on April 15, 2016, which will take effect on July 15th. The Fund-raising Measures have provided for specific regulations on fund-raising activities of PE funds, which aim to crack down on illegal activities such as public propaganda, misleading propaganda, collecting capital from unqualified investors and illegal sales of “Fei Dan” by certain practitioners (i.e., taking advantage of the reputation/platform of the sales institution to sell fund products not offered by the sales institution), etc. The Fund-raising Measures have set out clear provisions on the scope and activities of offering institutions. It is provided that fund managers may offer funds by themselves or entrust qualified fund sales institutions to offer funds. Effectively fund managers are not allowed to entrust the fund offering to other fund managers, and therefore Fund Management Institutions are restricted from concurrently engaging in the brokerage business. Meanwhile, the Fund-raising Measures have strengthened the responsibilities of PE fund managers, including duties to assess and identify qualified investors. It is also provided that PE fund managers shall not be exempted from legal liabilities in the event of entrustment of the fund offering. The Fund-raising Measures explicitly forbid public propaganda of fund products and performance, propagandizing to non-specific targets and illegal split and transfer of fund shares. In order to better protect the interests of investors, the fund raising institutions are also required to confirm the qualification of qualified investors and to comply with the cooling-off period and return-visit requirements. 7 Therefore, we suggest that Fund Management Institutions formulate or improve their own fund offering procedures in accordance with the Fund-raising Measures so as to ensure compliance, and in particular, pay attention to their potential legal liabilities. When necessary, Fund Management Institutions are advised to engage professional lawyers to prepare/revise their contract templates and other relevant transaction documents for the purpose of compliance and reasonable mitigation of risks.