New fund rules may lead to structural changes
February 07, 2012 | BY
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Private equity and venture capital funds are only allowed to target qualified investors that satisfy the requirements of new rules regulating fundraising in equity investment enterprises (EIEs). As a result, fund structures may require changes to ensure compliance, say counsel.
The Circular on Promoting the Standardised Development of Equity Investment Enterprises (关于促进股权投资企业规范发展的通知), which was published by National Development and Reform Commission (NDRC), is the first national regulation governing illegal fundraising by non publicly-traded enterprises.
The five-chapter Circular has put forward a series of standardisation requirements, one of which demands that existing limitations be adhered to on the number of investors in EIEs. This is of “the most practical importance”, according to Haibin Xue of Zhong Lun Law Firm.
“Commercial funds are now only permitted to target those qualified investors rather than the general public as a whole, which will narrow the scope of their fundraising activities,” said the Beijing-based partner.
In addition, private equity (PE) or venture capital (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 are 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. JQ
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