China's National Development and Reform Commission (NDRC) has recently taken further steps to regulate and standardise fundraising by private equity funds and the operation of fund management companies in China.

Circular 253

NDRC issued a Circular on Further Regulating the Development and Record Filing of Equity Investment Enterprises in Pilot Areas (Circular 253) in January 2011, which requires, among others, that each private equity fund set up in Beijing, Tianjin, Shanghai and several leading provinces with commitments of RMB 500 million or more register with NDRC after such fund has registered with the local Administration of Industry and Commerce (AIC) and successfully completed fundraising, except where (i) the fund has registered with NDRC as a venture capital enterprise under separate regulations, or (ii) all its capital is contributed by one institutional or individual investor, or by two or more investors that are wholly owned subsidiaries of one institutional investor.

NDRC Guidelines

Subsequently, on 21 March 2011, NDRC made available on its website a series of guidelines and template documents (the Guidelines) to provide further guidance on the registration process and the fundraising and operations of private equity funds. The Guidelines include private placement guidelines, guidelines for required information in private placement memoranda and constitutive documents of the private equity fund and fund management company, and other fund documents, including management agreement and custodian agreement. The Guidelines also specify the content of the PRC legal opinion in connection with the NDRC application as well as recommended forms for the application letter.

Issues to Note

The Guidelines exempt from NDRC registration funds with

  • capital commitments of less than RMB 500 million
  • capital commitments of more than RMB 500 million, of which less than RMB 100 million has been called and contributed

Accordingly, the trigger for registration with NDRC is (i) a private equity fund (ii) already registered with a local AIC (iii) capital commitments of at least RMB 500 million and (iv) capital contributed of more than RMB 100 million.

In addition to restrictions for private placements set forth in Circular 253, NDRC recommends for the first time that the threshold investment amount for each investor in a private equity fund should be at least RMB 10 million, and with respect to any individual investor, requires the fund to obtain documentary evidence of such individual investor's assets, as a way to ensure such investor has sufficient ability to understand and bear the risks related to such investment. The Guidelines prohibit the use of nominee investors in private equity funds and effectively require each investor in a private equity fund to invest in its own name.

Circular 253 and the Guidelines represent the NDRC's effort to regulate the development of private equity funds in China. Such regulations provide guidance and, to certain extent, legality for the private equity industry in China.