Under Article 54 of the Regulations Governing Securities Investment Trust Funds, a securities investment trust enterprise is required to utilize funds pursuant to the relevant securities investment trust contracts for privately placed funds. The Financial Supervisory Commission (hereinafter, the "FSC") issued the Jin-Guan-Zheng-Tou-10300215051 Circular of July 14, 2014 (hereinafter, the "Circular"), pointing out that privately placed securities investment trust funds (hereinafter, the "Private Funds") may be invested in offshore funds not approved or effectively declared to the FSC.

The Circular first points out that although a Private Fund may be invested in offshore funds not approved by or effective declared to the FSC, a target offshore fund to be invested is still subject to certain restrictions, including: (1) the management entity of such offshore fund should have been established for at least one year with no penalties ever imposed by local competent authorities in the past two years; (2) there should be periodic and reasonable prices sufficiently available for valuation; and (3) the ratio of such offshore fund's investment in securities and red-chip stocks in mainland China should not exceed the ratio set by the FSC pursuant to Article 23, Paragraph 1, Subparagraph 3 of the Regulations Governing Offshore Funds. The ratio restriction on investment in mainland China mentioned above is that an offshore fund placed and distributed in this nation with investment in securities in securities markets in mainland China can only invest in securities of listed companies, and that the total amount of such securities investment shall not exceed 10% of the net asset value of such offshore fund. However, this restriction does not apply if an offshore equity index fund has been listed or traded at Taiwan Stock Exchange with the approval of the FSC (the Jin-Guan-Zheng-4-09700350642 Circular).

In addition to the restrictions on target offshore funds, the Circular also requires privately placed fund entities seeking to invest in offshore funds not approved by or effectively declared to the FSC to follow relevant restrictions. First, the fund trust contract should stipulate that "this Fund may invest in any offshore fund not approved by or effectively declared to the FSC (including hedge funds)." In addition, the prospectus should disclose the criteria for selecting offshore funds, including but not limited to the characteristics, investment strategies, risk profile, track records, valuation methodology, fund management entities and the backgrounds and experience of fund managers of such funds. In addition, the cover page of the prospectus should also provide relevant information so that investors can understand the risks for a Private Fund to choose offshore funds and include a precautionary text indicating that the investors should consider their own circumstances in deciding whether to invest and that the investors are advised to read the prospectus carefully before making any investment.

Finally, the Circular also requires that a securities investment trust enterprise should formulate the standards and risk monitoring and control measures for selecting such offshore funds within its internal control systems when it utilizes any Private Fund to invest in offshore funds not approved by or effectively declared to the FSC, and that relevant internal control systems should be approved by the Board of Directors of the securities investment trust enterprise.