Focus on regulation of privately offered investment funds

The Interim Measures for the Regulation of Privately Offered Investment Funds were implemented on 21 August 2014. The measures resolve the issues of private fund manager and private fund management rights, and also provide greater detail on the specific regulatory method.

Scope of application

The scope of the territory where private funds governed by the measures can be established is the People’s Republic of China. The measures are silent on whether they cover Hong Kong, Macau and Taiwan, and accordingly the measures should also govern the establishment of private funds in these three regions. The feature particular to private offering is that funds are raised from investors by a “non-public method”, which is the essential difference, as compared to public offering.

Chapter 3 of the measures specifies what “qualified investors” are, and article 14 of chapter 4 further specifies that private funds may not be raised from “non-specific targets”. Accordingly, private funds and their managers may only raise funds from specific targets among the qualified investors specified in the measures, and only in this way is the raising of funds by “non-public method” constituted.

The things in which private funds can invest are quite broad, including the stocks of joint stock limited companies already offered on the public market, equity of limited companies, and other negotiable securities. The measures also expressly set out a catch-all provision: “other targets specified in the investment contract”. This is a major breakthrough in the field of private fund investment.

The non-publicly offered funds specified in the measures not only include companies “the objective of which is to carry on investment activities”, but also partnerships. So long as their “assets are managed by a fund manager or a general partner”, the measures govern their registration/recordal, fundraising and investment operations, and they are subject to the oversight of the China Securities Regulatory Commission (CSRC).

The measures additionally specify that they govern “the engagement in private fund business by securities companies, fund management companies and futures companies, and their subsidiaries”. However, if laws, regulations or the CSRC provide otherwise, such other provisions apply on a priority basis.

Regulatory operation

The regulator of private funds is the CSRC. Private fund management institutions and the offering of private funds are not administrative approval matters, but pursuant to the measures and other related regulations recordal needs to be carried out with the fund industry association. Oversight of fund offerings is to be established and improved, during-the-fact and after-the-fact oversight is to be strengthened, and the red line of “illegal fund raising” must not be crossed.

The Asset Management Association of China (AMAC), as the industry association for private funds, promotes the development of the private fund industry. The specific duties of AMAC are to carry out industry self-regulation, co-ordinate industry relations, and provide industry services.

Registration and recordal

The measures specify that registration needs to be carried out for managers of privately offered investment funds, and recordal needs to be carried out for the funds. Private fund managers here includes the management personnel of companies with legal personality, the objective of which is investment, and the general partners of funds organised in the form of limited partnerships.

Recordal of a private fund is to be carried out after completion of the offering. The recordal entity is the private fund manager. When carrying out recordal, a private fund is required to state whether its investment orientation includes investment in securities offered on the public market and the type of fund that it is.

Depending on the legal form of a fund, it is required to submit the fund contract and its articles of association or partnership agreement. If there was a fund prospectus, it is to be provided. If the fund is a company or partnership, photocopies of the originals and duplicates of the business registration and business licence additionally need to be provided.

Custody agreement

If the management custody and/or asset custody methods are opted for, the custody agreement is to be provided. The AMAC has the right to require an applying fund to provide other information it deems necessary.

The measures define a qualified investor of a private fund as an entity or individual that:

1. Has the attendant capacity to identify and bear risks, and invests not less than RMB1 million (US$160,000) in a single private fund; and
2. Has net assets of not less than RMB10 million, in the case of an entity, or financial assets of not less than RMB3 million, or an average annual income during the most recent three years of not less than RMB500,000, in the case of an individual.

   The measures expressly provide for qualified investors of private funds in article 12, but also specify entities in article 13 that do not satisfy the requirements of article 12 but are nonetheless deemed qualified investors:

   1. Social security funds, enterprise annuities and other such social welfare funds as old-age funds, charitable foundations, etc.;
   2. Investment plans that have been lawfully established and placed on the record with the AMAC;
   3. Private fund managers that invest in the private funds under their management and their personnel; and
   4. Other investors specified by the CSRC.

Worth noting

It should be noted that: (1) by investing in a private fund, a social insurance fund does not lose its attribute of being non-profit because its investment is solely its current means for maintaining and increasing value, and so long as the investment returns are used for public welfare purposes, and the manager and donors do not divide them privately for their own benefit, they do not affect its investments; (2) the scope of “investment plans that have been lawfully established and placed on the record with AMAC” is not clear, and is generally understood as potentially including such fund products as asset management plans, etc.; (3) deeming “private fund managers … and their personnel” as being qualified investors of the funds under their management is conducive to giving them an interest in their private funds and thus better serving the investors; (4) the CSRC reserves the right to specify others that it deems qualified investors.