New fund rules may lead to structural changes

In addition, PE or VC funds that directly or indirectly offer investors guaranteed returns of capital or interest are expressly prohibited. This, in effect, converts an equity investment into a loan facility, said Xue.

“In light of the new specific requirement prohibiting such a guarantee, the contents and structures of those VC and PE funds will have to be changed to ensure compliance,” he added.

PE and VC funds are required to satisfy the new requirements throughout the whole investment process. This includes how commercial funds can be incorporated, from whom they can raise finance, and how they should be managed, as well as risk control and information disclosure requirements. Funds will also need to be registered with the relevant authorities.

It is also the first time that a PE or VC fund is required to be registered with authorities at a national level instead of under various local rules governing the registration of such funds.

“Accordingly, institutional investors or banks that intend to invest in any new PE or VC fund also need to ensure that those funds have been incorporated and operated in compliance with the Circular for the avoidance of potential liabilities,” said Xue.

He also noted that if investors are to assist with fundraising by using their institutional platform, such as displaying leaflets, they may equally breach requirements set out in the Circular. This might incur commercial or even criminal liability.

Commentators said that the regulation provides a legal framework, previously lacking, that protects individual investors from being induced to invest in financial products beyond their capacity. The real estate sector and small and medium sized enterprises are mostly likely to be affected by the new rules.