Establishment of Foreign-funded Venture Investment Enterprises Tentative Provisions

Repealed on January 30 2003: http://www.chinalawandpractice.com/Article/1693265/Administration-of-Foreign-invested-Venture-Capital-Investment.html

PART ONE: GENERAL PROVISIONS

Article 1: These Provisions have been formulated pursuant to the PRC, Sino-foreign Equity Joint Venture Law, the PRC, Sino-foreign Cooperative Joint Venture Law, the PRC, Wholly Foreign-owned Enterprise Law, the Company Law and other relevant laws and regulations, to encourage foreign companies, enterprises, other economic organizations and individuals (Foreign Investors) to invest in high- and new-technology industries in China and to establish and improve China's mechanism for Venture Investments.

Article 2: Foreign Investors shall be permitted to establish in China, independently or with Chinese companies, enterprises or other economic organizations (Chinese Investors), foreign-funded limited liability companies or Sino-foreign cooperative joint ventures without legal person status the business activity of which is Venture Investment (Foreign-funded Venture Investment Enterprises), pursuant to these Provisions.

Article 3: For the purposes of these Provisions, the term "Venture Investment" means an investment method consisting of equity investment, principally in unlisted high- and new-technology enterprises (Investees), and the provision to such enterprises of start-up management services with the object of obtaining gains in the form of capital appreciation.

Article 4: Foreign-funded Venture Investment Enterprises shall abide by relevant Chinese laws and regulations and may not prejudice the Chinese public interest. The legitimate business activities in China and lawful rights and interests of Foreign-funded Venture Investment Enterprises are protected by Chinese law.

PART TWO: ESTABLISHMENT AND REGISTRATION

Article 5: Foreign Investors shall satisfy the conditions set forth below:

(1) At least one Foreign Investor shall satisfy the following conditions:

(a) having Venture Investment as its main line of business;

(b) having cumulative capital under its management of not less than US$100 million in the three years before the application;

(c) having cumulatively invested not less than US$50 million of the capital under its management in the three years before the application;

(d) having professional management personnel with not less than three years experience in Venture Investment business;

(e) having the capacity to bear risk;

(f) having legitimate sources of funds;

(g) making a capital contribution to the Foreign-funded Venture Investment Enterprise of not less than 3% of the total amount contributed by the investors therein; and

(h) not having been subjected to serious punishment by the judicial authorities or other relevant authorities of its home country or China.

(2) At least one Foreign Investor shall satisfy the following conditions:

(a) having total net assets of not less than US$100 million in the year before the application;

(b) having the capacity to bear risk;

(c) having legitimate sources of funds; and

(d) making a capital contribution to the Foreign-funded Venture Investment Enterprise of not less than US$20 million.

(3) The other Foreign Investors shall satisfy the following conditions:

(a) having the capacity to bear risk;

(b) having legitimate sources of funds; and

(c) making a capital contribution to the Foreign-funded Venture Investment Enterprise of not less than US$10 million.

In the event that there is only one Foreign Investor, it must simultaneously satisfy the conditions specified in Paragraphs (1) and (2) hereof.

Article 6: The Chinese Investors in a Foreign-funded Venture Investment Enterprise established as a Sino-foreign equity joint venture in the form of a limited liability company, a Sino-foreign cooperative joint venture in the form of a limited liability company or a Sino-foreign cooperative joint venture without legal person status shall satisfy the conditions set forth below:

(1) At least one Chinese Investor shall satisfy the following conditions:

(a) having Venture Investment as its main line of business;

(b) having cumulative capital under its management of not less than Rmb100 million in the three years before the application or having total net assets of not less than Rmb100 million in the year before the application;

(c) having cumulatively invested not less than Rmb30 million;

(d) having professional management personnel with experience in Venture Investment business;

(e) having the capacity to bear risk;

(f) having legitimate sources of funds;

(g) making a capital contribution to the Foreign-funded Venture Investment Enterprise of not less than US$5 million; and

(h) not having been subjected to serious punishment by the judicial authorities or other relevant authorities.

(2) The other Chinese Investors shall satisfy the following conditions:

(a) having the capacity to bear risk;

(b) having legitimate sources of funds; and

(c) making a capital contribution to the Foreign-funded Venture Investment Enterprise of not less than US$5 million.

Article 7: The capital contribution(s) made to the Foreign-funded Venture Investment Enterprise by the Foreign Investor(s) shall not account for less than 25% of the capital contributions made by all the investors therein.

Foreign Investors shall make their capital contributions in a freely convertible currency, whereas Chinese Investors shall make their capital contributions in Renminbi.

Investors may make their capital contributions in instalments in accordance with the provisions of the contract. The first instalment may not be less than 15% of the capital contribution subscribed to by each investor and shall be paid in full within three months after the date of issuance of the Foreign-funded Venture Investment Enterprise's business licence. The balance of the capital contributions shall be paid in full within three years after the date of issuance of the Foreign-funded Venture Investment Enterprise's business licence.

Article 8: The total of the capital contributions subscribed to by the investors in a Foreign-funded Venture Investment Enterprise shall be its total amount of investment. The total amount of investment of a Foreign-funded Venture Investment Enterprise shall principally be used to make equity investments in Investees.

Article 9: The establishment of a Foreign-funded Venture Investment Enterprise shall be carried out in accordance with the following procedure:

The investors shall submit the application and relevant documents to the Ministry of Foreign Trade and Economic Cooperation (the Examination and Approval Authority) through the competent provincial-level foreign trade and economic cooperation department of the place where the proposed Foreign-funded Venture Investment Enterprise is to be established. Within 45 days of the date of receipt of all the submitted materials, the Examination and Approval Authority will, after reaching agreement in discussions with the Ministry of Science and Technology, render its written decision on whether to give its approval. If it grants its approval, it will issue an Approval Certificate for a Foreign Investment Enterprise.

After the establishment of a Foreign-funded Venture Investment Enterprise has been approved, an application for its registration shall be filed with the State department for industry and commerce administration within one month of the date of receipt of the Approval Certificate for a Foreign Investment Enterprise issued by the Examination and Approval Authority.

Article 10: When applying to establish a Foreign-funded Venture Investment Enterprise, the following documents shall be submitted to the Examination and Approval Authority:

(1) an application for establishment signed by the investors;

(2) the contract for, and the articles of association of, the Foreign-funded Venture Investment Enterprise signed by the investors (here and hereafter, if the Foreign-funded Venture Investment Enterprise is established in the form of a wholly foreign-owned limited liability company, only the articles of association need be submitted);

(3) the investors' registration certificates (photocopies), proof of creditworthiness issued by their banks and proof (photocopies) of their legal representatives' status as such;

(4) the investors' annual balance sheets and profit and loss statements for the last year audited by accounting firms;

(5) descriptions of the investors' sources of funds;

(6) a description of the Venture Investment business of the/a Foreign Investor satisfying the requirements of Paragraph (1) of Article 5, a description of the capital under its management during the three years before the application, a description of the capital invested from the capital under its management during the three years before the application, the resume of its Venture Investment personnel and a statement that it has not been subjected to serious punishment;

(7) if the Foreign-funded Venture Investment Enterprise is to be established as a Sino-foreign equity joint venture in the form of a limited liability company, a Sino-foreign cooperative joint venture in the form of a limited liability company or a Sino-foreign cooperative joint venture without legal person status, then a description of the Venture Investment business of the/a Chinese Investor satisfying the requirements of Paragraph (1) of Article 6, a description of the capital under its management during the three years before the application or a description of its net assets for the year before the application, a description of the capital that it has invested, the resumes of its Venture Investment personnel and a statement that it has not been subjected to serious punishment shall also be submitted;

(8) a description of the Venture Investment business experience of the principal management personnel of the proposed Foreign-funded Venture Investment Enterprise; and

(9) other documents required by the Examination and Approval Authority.

The relevant materials in Items (5), (6), (7), and (8), or written opinions thereon, shall be issued by such relevant intermediary organizations as accounting firms, law firms, notarial institutions, etc.

Article 11: When applying for the registration of a Foreign-funded Venture Investment Enterprise, the applicant shall submit documentation to the State department for industry and commerce administration in accordance with the PRC, Administration of Enterprise Legal Person Registration Regulations and their Implementing Rules.

PART THREE: ORGANIZATION, OPERATION AND MANAGEMENT

Article 12: A Foreign-funded Venture Investment Enterprise may engage in the following business:

(1) investing all of its own funds in high- and new-technology sectors in which foreign investment is encouraged or permitted by the State and other sectors approved by the State;

(2) providing Venture Investment consulting services;

(3) providing management consulting services to its Investees; and

(4) other business approved by the Examination and Approval Authority.

Article 13: A Foreign-funded Venture Investment Enterprise may not engage in the following activities:

(1) investing in sectors in which foreign investment is banned by the State:

(2) directly or indirectly investing in securities, options, futures or any financial derivatives, except for the shares held by the Foreign-funded Venture Investment Enterprise after the listing of an Investee or the shares accruing thereto by way of rights issue or bonus;

(3) directly or indirectly investing in immovables not for its own use;

(4) taking out loans and investing the proceeds;

(5) investing funds that are not its own;

(6) providing loans or security;

(7) other activities that are prohibited by laws and regulations.

Article 14: Foreign-funded Venture Investment Enterprises established in the form of a limited liability company shall have a board of directors. Foreign-funded Venture Investment Enterprises established in the form of a Sino-foreign cooperative joint venture without legal person status shall have a joint management committee. The directors or members appointed to the board of directors or joint management committee by the investors shall jointly manage the Foreign-funded Venture Investment Enterprise on behalf of the investors. The board of directors or joint management committee shall decide all the important issues of the Foreign-funded Venture Investment Enterprise.

Article 15: The investors in a Foreign-funded Venture Investment Enterprise established in the form of a Sino-foreign cooperative joint venture without legal person status may provide, in the cooperation contract, for an internal gains distribution mechanism in accordance with international practice. The investors in a Foreign-funded Venture Investment Enterprise established in the form of a limited liability company may provide, in the articles of association, for the performance remuneration to be granted to management personnel, in accordance with the law.

Article 16: The investors in a Foreign-funded Venture Investment Enterprise established in the form of a Sino-foreign cooperative joint venture without legal person status shall be jointly and severally liable for the debts incurred by the Foreign-funded Venture Investment Enterprise. The investors in a Foreign-funded Venture Investment Enterprise established in the form of a Sino-foreign cooperative joint venture without legal person status may also provide, in the cooperation contract, that at least one investor shall bear joint and several liability for the debts of the Foreign-funded Venture Investment Enterprise, and the other investors shall bear liability to the extent of the capital contributions subscribed to by them or in accordance with the provisions of the cooperation contract.

Article 17: An operation and management organization shall be established under the board of directors or joint management committee. Such organization shall be responsible for day-to-day operations and management and executing the investment decisions of the board of directors or joint management committee, as authorized by the board of directors or joint management committee.

Article 18: The principal personnel of the operation and management organization shall satisfy the following conditions:

(1) having civil capacity that has not been subjected to any restrictions;

(2) having no criminal record;

(3) having no record of improper business operations;

(4) having experience in the Venture Investment business and not having any record of conduct in the financial sector in breach of regulations; and

(5) satisfying other conditions imposed by the Examination and Approval Authority.

Article 19: The operation and management organization shall regularly report on the following matters to the board of directors or joint management committee:

(1) authorized major investment activities;

(2) quarterly, interim and annual performance reports and financial reports;

(3) other matters specified in laws and regulations; and

(4) relevant matters specified in the contract and/or articles of association.

Article 20: A Foreign-funded Venture Investment Enterprise shall obtain profits and dividends from its Investee and may lawfully select an appropriate exit mechanism in accordance with operational needs, including:

(1) assigning all or part of the equity it holds in the Investee to another enterprise or individual;

(2) with the consent of the Investee, entering into an equity buyback agreement under which the Investee buys back, under set conditions, the equity held in it by the Foreign-funded Venture Investment Enterprise;

(3) when the Investee satisfies the conditions for listing provided in laws and regulations, it may apply to list on a domestic or foreign stock market; in such event, the Foreign-funded Venture Investment Enterprise may lawfully transfer the shares it holds in the Investee through the stock market; or

(4) another method permitted in Chinese laws and regulations.

The specific measures for the buying back by Investees of the equity held in them by Foreign-funded Venture Investment Enterprises will be formulated separately by the Examination and Approval Authority.

Article 21: The investors stipulated in Paragraph (1) of Article 5 (Investors With Primary Liability) may not withdraw their investments from Foreign-funded Venture Investment Enterprises during the existence of such Foreign-funded Venture Investment Enterprises. If an Investor With Primary Liability truly needs to withdraw its investment due to special circumstances, all of such investor's responsibilities and obligations must be assumed by a new investor. The withdrawal by an Investor With Primary Liability of its investment may not prejudice the interests of the Foreign-funded Venture Investment Enterprise or any third parties. Furthermore, the contract for, and the articles of association of, the Foreign-funded Venture Investment Enterprise shall be appropriately amended and submitted to the Examination and Approval Authority for its approval.

Article 22: The investors shall stipulate the term of the Foreign-funded Venture Investment Enterprise in the contract therefor and the articles of association thereof. In general, the term shall not exceed 12 years. The term may be renewed upon expiration, subject to the approval of the Examination and Approval Authority.

A Foreign-funded Venture Investment Enterprise may be dissolved, and its contract and articles of association terminated, ahead of schedule, subject to the approval of the Examination and Approval Authority.

When a Foreign-funded Venture Investment Enterprise is dissolved, it shall be liquidated in accordance with the relevant regulations.

PART FOUR: EXAMINATION AND OVERSIGHT

Article 23: The investment in an Investee by a Foreign-funded Venture Investment Enterprise, or the total investment in an Investee made by a Foreign-funded Venture Investment Enterprise together with one or more other Foreign Investors, shall in general account for not less than 25 percent of the registered capital of the Investee. Such Investee shall be entitled to treatment as a foreign investment enterprise and shall be issued an approval certificate for a foreign investment enterprise and an enterprise legal person business licence.

Article 24: The investments that a Foreign-funded Venture Investment Enterprise wishes to make in an Investee shall be submitted for separate approval in accordance with the limits of examination and approval authority and the examination and approval procedures governing foreign investment enterprises. If approval is obtained, the same shall be filed with the Examination and Approval Authority for the record within one month of the date approval is obtained. In the event of failure to carry out record filing procedures within the stipulated time limit in accordance with the foregoing requirements, the approval shall be null and void.

Article 25: When a Foreign-funded Venture Investment Enterprise invests in an Investee, it may not assign the equity it holds in the Investee before it pays in on schedule the capital contribution to which it has subscribed.

Article 26: When a Foreign-funded Venture Investment Enterprise assigns equity it holds in an Investee and when an Investee invested in by the Foreign-funded Venture Investment Enterprise terminates, the matter shall be reported to the Examination and Approval Authority for its approval and, upon approval, the relevant procedures shall be carried out with the State department for industry and commerce administration. When giving its approval, the Examination and Approval Authority shall obtain the consent of the Ministry of Science and Technology.

Article 27: A Foreign-funded Venture Investment Enterprise shall submit the details of its investments and operations for each half year to the Examination and Approval Authority for the record within the first month of the following half year, which information shall also constitute one of the materials required for participating in joint annual inspections. Any failure to complete record filing in accordance with the foregoing provision will be appropriately dealt with by the Examination and Approval Authority after discussions with the relevant department(s) of the State Council.

Article 28: If a member of the principal personnel of the operation and management organization of a Foreign-funded Venture Investment Enterprise carries out an illegal operation, his liability shall be pursued in accordance with the law and, if the circumstances are serious, he may not continue to engage in Venture Investment and related investment management activities.

PART FIVE: SUPPLEMENTARY PROVISIONS

Article 29: The investment in, and establishment of, Foreign-funded Venture Investment Enterprises in mainland China by investors from the Hong Kong Special Administrative Region, the Macao Special Administrative Region and the Taiwan region shall be handled with reference to these Provisions.

Article 30: The Ministry of Foreign Trade and Economic Cooperation, the Ministry of Science and Technology and the State Administration for Industry and Commerce are in charge of interpreting these Provisions.

Article 31: These Provisions shall be implemented from the date of promulgation.