Venture capital funds face two-track regulatory system

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China’s new Securities Investment Fund Law includes private security investment funds within the scope of adjustment, specifying that the registration of private investment fund managers and the recordal of private funds are to be carried out by the fund industry association. Subsequently, the State Commission Office for Public Sector Reform issued the Notice on the Division of Responsibilities for the Administration of Private Equity Funds, specifying that the China Securities Regulatory Commission (CSRC) is charged with the oversight of private equity (PE) funds, and the National Development and Reform Commission (NDRC) with arranging for the drafting of policies and measures for promoting the development of PE funds and, in concert with relevant authorities, studying and formulating standards and codes for government capital contributions to PE funds.

李寿双 Li Shoushuang
李寿双 Li Shoushuang

Funds regulated by the CSRC

Pursuant to the Securities Investment Fund Law, and as authorised by the CSRC, the Asset Management Association of China formulated the Measures for the Registration of Private Investment Fund Managers and the Recordal of Funds (for Trial Implementation), which was implemented on 7 February 2014. With this, private investment funds are regulated by the CSRC.

However, just when people in the industry thought that the dust had finally settled in this protracted struggle over regulatory authority, the NDRC issued the Notice on Further Duly Carrying Out the Work Associated with Supporting the Development of Venture Capital Enterprises on 13 May 2014. Although the caption for article 1 is “Simplifying Government and Delegating Authority”, it nevertheless reiterates the requirement of recordal of venture capital (VC) enterprises, with the only difference being that it is no longer the NDRC doing the recordal work, as the recordal authority has been delegated to the provincial-level development and reform commissions or corresponding authorities.

The tone of the notice is soft and indirect, but its significance is pronounced, as it provides another means of reiterating the requirement of the development and reform commission system for the recordal of VC enterprises.

Two-track regulatory regime

In this way, VC funds will face a two-parallel-track regulatory regime with, on the one hand, development and reform commission recordals that still need to be carried out as usual, and on the other hand, the new recordal regulations formulated by the Asset Management Association of China that also need to be observed.

VC fund regulation has entered the age of the two-track system. Of course, there is no regulation in the world that is completely without rhyme or reason, and one extra regulator is not necessarily a bad thing. What is of considerable interest is that, while reiterating recordal authority, the issue of the implementation of bond issuance by VC enterprises proposed several years ago by the NDRC’s Department of Fiscal and Financial Affairs has finally come to pass.

Additional financing model for VC enterprises

Not only is the offering of corporate bonds by qualified VC enterprises supported, but the review of applications for bond issues by VC enterprises specifically for the purpose of investing in micro and small enterprises will be accelerated. Not only is bond issuance by VC enterprises themselves supported, but the offering of corporate bonds by qualified shareholders or limited partners of VC enterprises to be used to invest in VC enterprises is also supported.

This offers VC enterprises an additional financing model. In future, they will not necessarily rely solely on privately raised funds for investment, but could make investments using the proceeds from bond offerings.

Of course, in this, we recommend that special attention needs to be paid to the liquidity risk if the bond term and payback time are mismatched.

Li Shoushuang is a senior partner at Dacheng Law Offices in Beijing and can be contacted by telephone at: +86 10 5813 7650 or by email at: shoushuang.li@dachenglaw.com