The China Securities Regulatory Commission (“CSRC”) issued the Interim Measures for the Supervision and Administration of Private Investment Funds (the “Measures”) on August 21, 2014, which became effective on the same day. The Measures follow substantially the draft that was issued for public comments in July 2014. The Measures provide much-awaited clarifications to a number of issues pertinent to the private investment fund regime in China.
Scope of Application of the Measures
The Measures define “private investment funds,” or “private funds,” as investment funds that are established through private fund raising from investors in the People’s Republic of China. The registration and filing, fund raising and operation of private funds are now subject to the Measures. The Measures cover funds that are established in corporate or partnership form for investments whose assets are managed by fund managers or general partners. The Measures expressly include securities companies, fund management companies, futures companies and their subsidiaries within the ambit of application.
The Measures state that private funds may invest in stocks, equity interests, bonds, futures, options, fund units or other investments defined in the investment agreement. As such, the Measures evidently apply to private funds formed for secondary market investments and those formed for private equity investments.
Main Features of the Measures
The Measures in ten chapters set forth the regulatory regime for private funds under five key topics: (i) registration and filing; (ii) qualified investors; (iii) fund raising; (iv) fund operation; and (v) special rules for venture capital funds.
A. Registration and Filing
The Measures adopt the approach of post-event registration and filing instead of pre-approval in relation to private funds and their managers. The Measures require that private fund managers (a) register with the Asset Management Association of China (“AMAC”) according to AMAC’s requirements; and (b) complete the relevant filings in accordance with AMAC’s requirements after fund raising is completed. Filing entails the submission of such information as (i) the investment mandate and fund classes; (ii) the articles of association, partnership agreement, and prospectus; and (iii) the investment management agreement and custody agreement. The registration and filing requirements are set forth in the Measures on the Private Investment Fund Manager Registration and Fund Filing (Pilot) (the “Pilot Measures”), issued by AMAC on February 7, 2014.
B. Qualified Investors
A qualified investor is defined as an entity or individual that (a) is capable of identifying and bearing investment risks; (b) invests at least RMB1 million in a single private fund; and (c) has assets or income meeting the minimum thresholds. The minimum thresholds are set out as follows:
- An entity with net assets of at least RMB10 million;
- An individual investor with financial assets of at least RMB3 million, or annual income of at least RMB500,000 for the three most recent years. (Financial assets can include bank deposits, stock, bonds, futures, and interests in funds, asset management schemes, trust plans, and insurance products.)
The Measures stipulate that an investor who falls under one of the following categories is deemed a qualified investor, without specific threshold requirements:
social security funds, annuity funds and charitable funds;
investment schemes lawfully established and duly filed with AMAC;
private fund managers or their staff investing in private funds under their management; and
other investors specified by CSRC.
The Measures also provide that the total number of investors in a single fund cannot exceed the number specified in the Securities Investment Fund Law, the Company Law and the Partnership Law. Where an investor directly or indirectly invests in a private fund through the pooling of capital in a partnership, investment contract or other unincorporated means, the fund managers or distributors must “look through” to verify the qualifications of the ultimate investors and consolidate the number of investors, except for certain deemed qualified investors.
C. Fund Raising
During fund raising, fund managers and distributors are prohibited from:
- offering a fund to non-qualified investors, or advertising or promoting a fund to non-specific targets by means of (a) public media such as newspapers, radio, television and the internet, (b) lectures, press conferences, seminars, announcements or pamphlets, or (c) text messages, Wechat, micro blog or emails;
- making representations on guaranteed returns of investment principal or minimum investment returns.
Moreover, fund managers and distributors must assess investors’ capacity to identify and bear investment risks. This could be done through questionnaires and risk disclosure letters. Fund managers are expected to rate the risks of a fund and introduce the fund to investors who match the risk profile of such fund.
D. Fund Operation
The Measures stipulate rules for fund operation. These rules require that:
- Fund contracts be concluded in compliance with the Securities Investment Fund Law;
- Custody arrangement be established unless otherwise provided in fund contracts;
- Mechanism be established to avoid conflicts of interest, unfair treatment of assets of different funds under management, insider dealing, transfer of interests and disclosure of non-public information; and
- Certain information be disclosed to the investors and AMAC.
E. Special Rules for Venture Funds
There is a separate chapter under the Measures for venture capital funds. Venture funds are defined as equity investment funds that are established to invest in ordinary shares, convertible preferred shares or convertible debt of unlisted companies. The Measures require that AMAC adopt a separate set of industry self-regulatory policies and provide a distinct bundle of member services to venture funds. The Measures encourage venture funds to invest in early stage small enterprises.
The Measures represent continuing efforts by CSRC to develop the private fund regulatory regime in China. They provide the first implementing legal framework for the establishment and operation of private funds. The promulgation of the Measures will, we believe, accelerate the growth and development of the private fund industry in China.