For the record, PE funds should ensure they carry out proper filing

TheNotice on Promoting the Compliant Development of Equity Investment Enterprises, issued by the National Development and Reform Commission (NDRC) on 23 November 2011, specifies that equity investment enterprises (including funds of funds) that invest in the equity of enterprises that are not publicly traded are required to carry out filing procedures, either with the NDRC or the local government.

The notice specifies that an equity investment enterprise is required to apply for filing within one month after business registration, and enterprises established before the implementation of the notice are required to carry out filing within three months after the issuance of the notice, with the following exceptions: venture capital enterprises; and equity investment enterprises with a capital contribution that was entirely made, and that were established, by a single entity or natural person, or that were jointly invested in and established by a single entity together with its wholly owned subsidiaries, or jointly invested in and established by several wholly owned subsidiaries of one entity.

Subsequently, various regions have issued complementary policies, clarifying local filing requirements. For example, Tianjin subjects existing equity investment enterprises to differential filing procedures. Those that have paid-in capital of not less than RMB20 million (US$3.2 million) are required to demonstrate that their limited partner’s capital contribution is not less than RMB1 million. Those that have already completed investment in a project are not required to show proof of their paid-in capital, but they are nonetheless required to show that their limited partners’ capital contribution is not less than RMB1 million. Other existing equity investment enterprises, if their operations are non-compliant, are required to achieve compliance within a specified period of time.

Three months after the notice took effect, a survey of the filing of equity investment enterprises conducted by the China Venture Capital Association revealed that 31.58% of 38 equity investment enterprises had carried out filing procedures, 13.16% were in the process of carrying out the procedures, 28.95% were preparing to carry out the procedures and 26.31% were not preparing to apply for filing. In practice, many had not carried out filing as required by the notice.

Not carrying out filing

Based on our practical experience and understanding of laws and regulations, the main effects are as follows: First, the notice specifies that: “If a recordal authority discovers that an equity investment enterprise or its entrusted management organisation has failed to carry out recordal, it shall cause such equity investment enterprise or entrusted management organisation to carry out recordal procedures with the authority within 20 working days; if the equity investment enterprise or entrusted management organisation fails to do so, it shall be classified as an ‘equity investment enterprise that evades filing supervision’, or an ‘entrusted management organisation that evades filing supervision’, and the same shall be publicly announced on the recordal authority’s web portal”.

From this it can be seen that an enterprise that fails to carry out filing will be put on a blacklist that is published online, and this could possibly affect the enterprise’s further engagement in equity investment and other related business. For example, against the background of the NDRC issuing a notice to bring compliance to the industry, a client that is contemplating the acceptance of an investment may give first consideration to an equity investment enterprise that has accepted regulatory filing.

Second, the failure to carry out filing could affect the future listing of an investee company. We have reviewed the prospectuses, legal opinions and lawyer work reports of companies that have listed A shares since the issuance of the notice, but have not seen any companies that have disclosed whether an equity investment enterprise (serving as a shareholder of the issuer) has carried out filing, nor have we found that the China Securities Regulatory Commission (CSRC) has given any opinion on this issue.

Looking at the publicly available information, the CSRC has not, since the issuance of the notice, expressly indicated whether filing status is a key point of its reviews. Although the information available shows that the failure by equity investment enterprises to carry out filing has not had a material impact on listings, it cannot be incontrovertibly stated that filing status will not become a key focus of the CSRC, particularly since the quality of information disclosure of listed companies has recently been emphasised by the CSRC. Accordingly, an enterprise should, if it satisfies filing conditions, complete filing as soon as possible.

Finally, the failure to carry out filing could affect eligibility for policy incentives, such as tax deductions. For example, the Notice on the Issuance of the Provisional Regulations for Promoting the Compliant Development of the Guangzhou Equity Investment Market specifies that the tax authorities should, to the extent permitted by state policy, accord the most favourable policies to equity investment enterprises and equity investment management enterprises that have carried out filing.

The Measures of Tianjin for the Administration of Equity Investment Enterprises and Equity Investment Management Firms specify that only equity investment enterprises and equity investment management firms that have carried out filing are eligible for the relevant incentive policies.

Further scrutiny

According to reports, the NDRC recently held a nationwide meeting specifically on the filing administration of equity investment enterprises, further clarifying the role of local regulators in filing and stating that it would continue to intensify oversight of equity investment enterprises, leaving no corner of the industry unturned.

Furthermore, the Securities Investment Fund Law (Amendment Draft) just underwent a second round of discussion by the Standing Committee of the National People’s Congress, on 23 October. If the new law adopts articles 100, 101 and 107 proposed in the amendment draft, PE investment funds will be regulated by the CSRC through registration and filing procedures. It is imperative for PE investment funds to subject themselves to oversight, either by the government or an industry association.

We would recommend that funds proactively handle the matter, in order to avoid any problems with their legal duration or investment business brought about because they failed to comply with relevant laws and regulations.

Zhao Menghan is a partner at Zhonglun W&D Law Firm in Beijing and the associate director of the firm’s private equity investment fund practice; Liang Xiaoning is a lawyer at Zhonglun W&D in Beijing