Article China: Government Issues First Regulation on Private Investment Funds

On July 3, 2023, the State Council of China issued the Regulation on the Supervision and Administration of Private Investment Funds (referred to as the “Private Fund Regulation”). The regulation will take effect on September 1, 2023. The introduction of the regulation fills a significant gap in the regulatory framework for private funds and, along with the Securities Investment Fund Law and the Interim Measures for the Supervision and Administration of Private Investment Funds, forms a relatively complete regulatory regime.

The Private Fund Regulation consists of seven chapters and 62 articles. The seven chapters include: “General Provisions,” “Private Fund Managers and Custodians,” “Fundraising and Investment Operations,” “Special Provisions regarding Venture Capital Funds,” “Supervision and Management,” “Legal Liability,” and “Supplementary Provisions.” Below are some of the highlights of the regulation.

Scope of Regulation Applicability

The regulation applies to investment activities in the territory of mainland China carried out through nonpublic fundraising and managed by private fund managers or general partners. (Regulation on the Supervision and Administration of Private Investment Funds art. 2.)

Qualified Investors

The funds must be raised from or transferred to “qualified investors.” “Qualified investors” refers to units and individuals that meet the specified asset-size or income-level requirements, that possess corresponding risk-identification and risk-bearing capabilities, and whose subscription amount is not less than the prescribed limit. (Art. 18, paras. 1 & 2.)

Prohibited Fundraising Activities

Private funds are prohibited from raising funds from or transferring funds to investors who are acting as nominees for others. They are also not allowed to engage in promotional activities through mass media channels such as newspapers, radio, television, or the internet. Additionally, they must refrain from using communication methods like telephone, SMS, instant messaging tools, emails, flyers, seminars, presentations, or analysis meetings to target unspecified individuals. Private funds are strictly prohibited from making any misleading, one-sided, or exaggerated promotions to potential investors. They must not guarantee investors that their invested capital will be entirely free from losses or promise a minimum return. (Art. 20.)

Special Provisions regarding Venture Capital Funds

The regulation offers preferential treatment to venture capital funds. “Venture capital funds” under the regulation refers to funds that are invested in unlisted entities, incorporate the venture capital strategy, do not use leveraged financing, and comply with minimum duration requirements set by the government. (Art. 35.)

Qualified venture capital funds enjoy simplified registration and filing procedures and less frequent inspections by the China Securities Regulatory Commission (CSRC). The CSRC will also facilitate investment exit for venture capital funds primarily engaged in long-term investment, value investment, and transformation of major scientific and technological achievements. (Art. 37.)

Foreign Institutions

Foreign institutions are not allowed to directly raise funds from domestic investors or establish private funds. (Art. 61, para. 2.)

The administrative measures for private-fund managers of foreign-invested funds are to be formulated by the CSRC and other relevant departments under the State Council. (Art. 61, para. 1.)

Goal of the Regulation

At a press conference on July 9, 2023, officials of the Ministry of Justice and the CSRC stated that the promulgation of the regulation aims to further regulate and encourage the private fund industry to “play a role in serving the real economy and promoting technological innovation.” As of May 2023, around 22,000 private-fund managers overseeing about 153,000 managed funds with a total value of approximately 21 trillion yuan (about US$2,938 billion) were registered with the Asset Management Association of China.

Prepared by Stephanie Sheng, Law Library Intern, under the supervision of Laney Zhang, Foreign Law Specialist