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Legal Update

Further Regulation of Private Equity Funds in China

13 December 2011
Mayer Brown JSM Legal Update

China's National Development and Reform Commission (NDRC) has issued a Circular on Promoting the Regularisation and Development of Equity Investment Enterprises (Circular 2864), effective 9 December 2011.

Circular 2864 seeks to provide guidance on the establishment and operation of private equity investment funds and represents a major step in the standardisation of the private equity investment fund industry in China.

Circular 2864 is the first nationwide set of administrative rules on private equity investment funds in the PRC and supersedes the NDRC's Circular on Further Regulating the Development and Record Filing of Equity Investment Enterprises in Pilot Areas (Circular 253), promulgated in January 2011.

Circular 253 required private equity funds, with capital commitments in excess of RMB 500 million, to register with the NDRC after registering with the local Administration of Industry and Commerce if they were formed in formed in Beijing, Tianjin, Shanghai or in one of several designated provinces. (For more information, see our prior Legal Update: NDRC Issues Guidelines for RMB Funds and Fund Management Companies)

Circular 2864 extends this registration requirement to all such private equity investment funds, wherever they are formed in the PRC.

However, private equity investment funds with capital commitments below RMB500 million need only register with their provincial registration authorities within one month after obtaining their business license.

In addition, Circular 2864 provides for the following:

1. Look-Through Concept

The most significant development in Circular 2864 is the introduction of a "look-through" concept with a view to ensuring the existing public offer registration requirements are not being circumvented.

By way of background, some private fund sponsors in China utilise feeder funds or trust products to evade the limit on the number of investors and raise capital from a large number of individual investors.

Under Circular 2864, any investor that is a non-legal person collective investment scheme, in particular, a trust product or a limited partnership, will be 'looked through' to identify the underlying investors in that scheme to determine whether:

  1. such ultimate beneficial owners are qualified to invest in private equity funds e.g. whether they are capable of understanding and bearing the risks involved; and
  2. the restrictions on the number of investors to whom private equity funds can be marketed, via a private placement, have been breached.

However, this look-through concept does not apply to any investor that is a fund of funds.

2. Senior Fund Management Personnel

Circular 2864 explicitly requires that no senior management personnel of a private equity investment fund or its management company should have committed a violation of law within the past five years or be involved in any ongoing lawsuit or proceeding with substantial economic value. At least three senior management personnel should each have more than two years' experience in private equity investment or related areas.

For inquiries related to this Legal Update, please contact Phill Smith, Yong Ren or your usual contacts with our firm.

Learn more about our PRC offices, Financial Services Regulatory & Enforcement, Private Equity / Venture Capital and Private Investment Fund practices

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