On August 21, 2014 China Securities Regulatory Commission (the “the CSRC”) officially released the Interim Measures for Supervision and Administration of Private Equity Investment Funds (the “Private Equity Measures”)which became effective at the same date. After a long time legal study and then soliciting opinions from the public for more than one month, the Private Equity Measure has finally come into sight, which officially announced the regulatory power of the CSRC on private equity investment funds. Compared with the Interim Measures for Supervision and Administration of Private Equity Investment Funds (Draft for Comments) published by the CSRC on July 11, 2014, there are no substantial changes to the general principles, but some specific amendments provisions are modified in the Private Equity Measures.
The Private Equity Measures is composed of 10 chapters and 41 sections in total, and the regulatory system mainly focuses on five aspects: (i)integrated registration and record-filing system; (ii)qualified investors threshold; (iii)fund-raising regulations;(iv) investment operational rules; and (v)special measures on venture capital funds. The main content of the Private Equity Measures is summarized as follows:
(1) The Scope of Application of the Private Equity Measures
Pursuant to the Private Equity Measures, the private equity investment funds (the “PE Funds”) refers to the investment funds established within the People’s Republic of China, by private offering and fund-raising targeting qualified investors.
The Private Equity Measures shall apply to the registration, record-filing, fund-raising activities, and investment operation of any company or partnership established by private offering and fund-raising to carry out investment activities, whose assets are managed by its fund manager or general partner. The Private Equity Measures shall also apply to the securities companies, public fund management companies and futures companies and their subsidiaries engaged in the private equity investment business.
(2) Integrated Registration and Record-filing System for PE Funds and their Managers
In respect of the registration and record-filing system of PE Funds and the managers of PE Funds(the “Manager”), the Private Equity Measures maintain the approach stated in Measures for Registration of Private Equity Investment Funds Managers and Filing of Funds (Trial) issued by Asset Management Association of China (the “AMAC”) this January, which adopted an “post-establishment supervision” method instead of administrative pre-approval on setup of the Manager or completion of funds raising. Pursuant to the Private Equity Measures, Managers shall, apply with the AMAC for registration and submit relevant information in accordance with requirements announced by the AMAC, then after the completion of fund-raising, the Manager shall cause the fund under its management to go through the record-filing procedures and submit the relevant information in accordance with requirements announced by the AMAC.
Due to the nature of such post registration and record-filing, the Private Equity Measures further clarifies that the registration of a Manager and the record-filing of a PE Fund with the AMAC shall not constitute a recognition of the investment capacities and continuous compliance of the Manager, and shall not serve as any kind of guarantee for the security of fund assets.
(3) The Qualified Investors
To be a qualified investor under the Private Equity Measures, three main requirements shall be satisfied: the minimum subscription amount, size of assets and income level, and the capacity to identify and take the investment risk. Pursuant to the Private Equity Measures, the minimum investment amount for a qualified investor in a single PE Fund shall not be less than RMB 1 million. In addition, for a qualified individual investor the financial assets shall not be less than RMB 3 million or average annual income shall not be less than RMB 500 thousands over the past three years; and for a qualified institution investor, its net assets shall not be less than RMB 10 million. Take some special situations into consideration, investors falling into either of the following four categories shall be deemed as qualified investors under the Private Equity Measures :(i) pension funds such as social security funds and enterprise, etc., and social welfare funds such as charitable funds;(ii) investment plans which is duly and legally established and filed record with the AMAC; (iii)Managers and their staffs investing in PE Funds under their own management; and(iv)other investors specified by the CSRC.
With respect to the number of investors, the Private Equity Measures requires the cumulative number of investors in a single PE Funds shall not exceed the specific number stipulated in the Securities Investment Fund Law, the Company Law, the Partnership Enterprise Law and any other applicable laws and regulations. The Private Equity Measures also adopts a “Pierce-through” Principle, which means if the PE Funds are directly or indirectly invested by a partnership or any other organizations without a legal person status (i.e., corporation based on contract.)with the capital raised from numerous investors, the Mangers and sales agencies of PE Funds shall inspect and examine the investors at each layer of the structure to make sure that the ultimate beneficiaries are qualified investors and investors at each layer shall be counted in to calculate the final number of the investors. However, the Pierce-through principle shall not apply to such investors falling into category (i), (ii) or (iv) as stated above deemed as qualified investors.
(4) Fund Raising Rules for PE Funds
Regarding targets and methods of fund raising, the Private Equity Measures states that the Manager and sales agencies of PE Funds shall not raise funds from entities or individuals other than qualified investors, conduct promotion and marketing activities towards unspecified objectives through newspapers, periodicals, radios, television, broadcasting, Internet and any other public media, or lectures, briefings and analysis meetings, or in the form of posting notices, distributing flyers, sending short messages, using We Chat, blogs, e-mails, etc.
In respect of cash income, the Manager and sales agencies of PE Funds managers and shall not make any guarantee of no loss to the capital principal or ensure the minimum profits to the investors.
With respect to the investors’ abilities to identify risks , the Private Equity Measures requires, (i)if the Manager sells units of PE Funds on their own, the Manager shall make evaluation on risk identification and tolerance abilities of the investors by questionnaires or any other methods and the investors herein shall make written confirmation that he or she is a qualified investor, and the Manager shall also prepare the Risk Disclosure Statement to be signed by the investors as confirmation; (ii)where a sales agency is entrusted by the Manager to sale units of PE Funds, the assessment and conformation and other measures stated in(i) shall be implemented by the agency. Whether the units of PE Funds are sold by the Manager or a sales agency, the risk rating shall be conducted by them or by a third party engaged by the Manager or the sales agency, and the promotion and marketing target shall be those investors with proper risk identification and tolerance abilities.
For the source of the Capital, the investors shall ensure the capital invested in PE Funds are from legitimate source, and shall not collect funds of others in an illegal manner to invest in the PE Fund.
(5) Investment Operation Rules of PE Funds
The Private Equity Measures standardizes rules in respect of investment activities and operation of PE Funds, including: (i) the fund contract shall be formed and entered into in accordance with or with reference to the Securities Investment Fund Law; (ii)the custodian of capital of PE Funds shall be arranged in accordance with the fund contract. But where the capital of the PE Fund is exempted from custodian pursuant to the fund contract, systems and measures to safeguard the security of property of the PE Fund private fund and a dispute resolution mechanism shall be explicitly stipulated in the fund contract; (iii)where potential interest tunneling or interest conflict exists between various PE Funds due to management of the same Manager, precaution systems shall be established; (iv) prohibited investment activities of managers, custodians, sales agencies or other service institution practitioners of PE Funds are listed; (v)the Manager shall accurately disclose the facts to investors the significant information that may affect their legitimate rights and interests. Furthermore, The Private Equity Measures also has stipulations on submitting of information and keeping and saving of important documents.
(6) Special Stipulations on Venture Capital Funds
The Private Equity Measures leave a special chapter on venture capital funds, making emphasis on differentiated supervising system and self-discipline arrangement, by the CSRC, the AMAC, and its dispatched authorities. The Private Equity Measures states that the venture capital funds shall refer to the private equity investment fund primarily investing in ordinary shares of unlisted venture companies, or preferred shares which may be legally convertible into ordinary shares, convertible bonds and other rights and interests. It is understood that PE Funds shall clearly indicate, in accordance with regulations and rules of AMAC, its investment orientation and type categorized based such investment orientation. In connection with the Measures for Registration of Private Equity Investment Funds Managers and Filing of Funds (Trial), and those registration and filing procedures publicly accessible online, funds can be categorized into private securities investment funds which mainly invest in securities listed on public exchanges, private equity investment funds which mainly invest in private equities not publicly traded, and other private investment funds which investing in art works, red wines and other specific merchandise, among which venture capital funds are listed separately as a special kind of private investment funds.
The Private Equity Measures is a regulation initially and officially published concerning supervision and administration of PE Funds. We have the view that the issuance of the Private Equity Measures will promote the development PE Funds industry of the PRC in a healthy and steady way. Meanwhile, much higher practicing standards are raised for the industry and its practitioners along with the CSRC’s bringing the PE Fund industry into the orbit of its supervision and administration.