In June 2013, the State Commission Office for Public Sector Reform made it clear that private investment funds are subject to the oversight of the China Securities Regulatory Commission (CSRC). As the CSRC failed to issue relevant regulations in the more than six months that followed, the recordal of private funds in fact came to a standstill.
As authorised by the CSRC, the Asset Management Association of China (AMAC) issued the Measures for the Registration of Managers of Private Investment Funds and Fund Recordal (for Trial Implementation)  No. 1 on 17 January 2014. Implementation of document No. 1 began on 7 February 2014, signifying the official commencement of registration and recordal of private funds under the CSRC regulatory regime. Our concise analysis of the regulatory approach contained in document No. 1 follows.
Nature of recordal
Under document No. 1, the recordal of private funds is not an administrative permission matter, but rather industry self-regulation that has information disclosure at its core, and good faith as its foundation. The AMAC will not conduct a substantive before-the-fact review of the information of a private fund that is placed on the record, but this does not mean that the recordal of private funds is not important.
Subject of recordal
Pursuant to document No. 1, the term “private fund” means an investment fund established by raising funds from qualified investors in a non-public manner, and includes companies and partnerships in which the assets are managed by a fund manager or general partner, and the objective of which is the conduct of investment activities. It is our understanding that all private funds, such as private securities investment funds, private equity investment funds, venture capital funds, etc., are required to carry out fund recordal procedures. Based on our contact with relevant working personnel, we have learned that private funds of a debt nature, which in the past lay in a murky area, are also subject to recordal.
It should be noted that although document No. 1 brings up the concept of qualified investor, it does not explain it. Based on our experience, we are of the opinion that how the term “qualified investor” is defined is crucial. That definition will affect numerous elements, such as the design of the framework of private funds, the work arrangements for offering the funds, and the design of the terms of partnership agreements. The requirement under the original National Development and Reform Commission (NDRC) regulatory regime was that the minimum capital contribution of any one investor could not be less than RMB100 million (US$16.4 million), but whether the threshold for investors will be raised or lowered under the CSRC regulatory regime awaits further clarification from the regulator. We will keep on top of the situation and promptly share relevant information with you.
Furthermore, document No. 1 does not mention the size of funds. Based on our contacts with relevant officials, we are of the opinion that all funds, regardless of their size, will need to be recorded in the AMAC’s private fund registration and recordal system.
A private fund manager is required to carry out recordal through the private fund registration and recordal system within 20 working days after completion of the offering of a private fund. If the private fund recordal materials are in order and satisfy requirements, the AMAC is required to complete the procedures for the recordal of the private fund by announcing its basic particulars on a website within 20 working days from the date of receipt of the complete recordal materials. The basic particulars announced on the website include the private fund’s name, date of establishment, recordal date, main investment sector, the fund manager and fund custodian, etc.
The uniform recordal and announcement through the AMAC’s private fund registration and recordal system far improves recordal efficiency as compared to recordal depending on fund size previously required by the NDRC, and makes it much easier for the regulators and the public to have an overall grasp of the details of the establishment of private funds, while also putting more regulatory pressure on private funds.
The AMAC is a national, industry and non-profit association voluntarily formed by relevant organisations in the securities fund investment industry, not an administrative authority. Accordingly, it does not have the power to impose administrative penalties, and document No. 1 is an industry self-regulation document in nature, not a legal document under Chinese law.
However, a violation of document No. 1, including failure to carry out recordal or providing false recordal information, may result in such penalties as a warning, circulation of a notice of criticism within the industry, public reproof, suspension of acceptance of fund recordal, revocation of membership qualifications, recording in the integrity file, or even transfer of the case to the CSRC for handling.
Some argue that the above-mentioned punishments do not have any serious consequences, but we disagree. First, future limited partners are investors with sufficient economic strength and can judge the market; they are very familiar with the market and regulations, and when they make a decision on investing in a certain equity investment firm, they will certainly be familiar with the relevant background, particularly whether the firm was subjected to any punishments in the past. Second, certain parties have already specified that equity investment firms that fail to carry out recordal may not pass annual inspections.
In short, from NDRC oversight to CSRC oversight, there has been a trend of increasingly stringent oversight over private funds. And the formal inclusion of private funds within the scope of oversight signifies that they have had their status recognised and can develop lawfully in future, opening a new space for the future development of the industry.
We would recommend that relevant enterprises conduct a review of their own circumstances as soon as possible and take compliant measures to accomplish recordal as quickly as possible.
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