In 2003, the People’s Republic of China Securities Investment Funds Law (PRC Fund Law) was promulgated, effective 1 June 2004. However, the 2004 PRC Fund Law regulated solely publicly-offered funds, leaving private funds in regulatory limbo. After nine years, on December 2012, China enacted new amendments which were ultimately adopted to the 2004 PRC Fund Law. The Amended Law depicts a thorough effort to regulate both public and private investment funds in China which comprise the proposed bringing of private investment funds under the management of the China Securities and Regulation Commission (CSRC).
Regulation of private investment funds in China
Prior to the amendment, the Securities Investment Fund Law only governed public funds, which left the increasingly prominent private investment funds in legal limbo. But now, the new rules set by China indicate important, positive changes in how financial institutions work in the longer term, with crucial positive implications for investors and the financial market. It is clear that a lot of thought has gone into the new rules, some of which are described below:
- The Qualified Investors
Private funds in China must be raised only from permitted investors. Each particular investor is required to invest at least RMB1 million in a private fund. In China, to be a qualified investor, the people or entities should have the ability to identify and undertake investment risks and must meet certain net worth or income requirements.
Additionally, the new China regulatory framework sets a limit on the number of qualified investors in a private fund, as asserted below:
- if the private fund is set up in the structure of a limited liability company or limited partnership, the number of investors mustn’t exceed 50.
- in case the private fund is set up in the structure of a joint stock limited company or general partnership, the number of investors can be more than 50 but less than 200.
- Limitations on Private Fund Raising
In China, private fund managers are not allowed to showcase private funds through public media such as newspapers, radio, TV, and the internet, or advertise private funds to non-specific potential investors via lectures, flyers, text messages, and emails. Nor can they give investors a no-principal-loss or minimum return assurance.
As compared with a public fund, a private fund will be subjected to reasonably flexible requirements. Depending on the amount of capital designated to be raised, and the quantity of unit holders of the fund, the fund manager of a private investment fund is only obliged to register with the China Securities and Regulation Commission or a fund industry association, and preliminary approval from the CSRC isn’t mandated.
While the launching of a public fund needs pre-filing with the CSRC, under the recent amendments, fundraising of a private investment fund is solely subject to post-filing mandates required to be filed with the CSRC or a fund industry association.
A private fund manager is also permitted to regulate a public fund, subject to the initial approval of the CSRC.
New forms of investment funds in China
Besides the current contractual form, the China Amended Law launches two additional forms of investment funds:
- committee form (available to both public and private funds): under this form, there is a committee as a standing body, with the goal of overseeing the day-to-day activities of the fund manager and the custodian.
- unlimited liability form (for a private fund only): under this form of fund, it is required that the fund manager or an organization with a controlling stake in the fund manager to assume unlimited liability for the liabilities of the fund.
Types of permitted investment products under the PRC Securities Investment Funds Law expanded: in addition to listed shares and bonds, a public fund is permitted to further invest in other types of securities and investment products as determined by the CSRC.
An engaging side point is whether this increased regulatory management in China will eventually be extended into other areas that could be of interest to global fund managers.
For professional advice on your investment and fund management in China, let’s go ahead together and contact your Damalion expert now.
