Circular on Promoting the Compliant Development of Equity Investment Enterprises

(Issued by the General Office of the National Development and Reform Commission on, and effective as of, November 23 2011.)

Fa Gai Ban Cai Jin [2011] No.2864

General offices of the people's governments of the provinces, autonomous regions and municipalities directly under the central government, and the General Office of the Xinjiang Production and Construction Corps:

With a view to regulating the operation and the record filing administration of equity investment enterprises (including equity investment funds of funds that invest in equity investment enterprises) established in the People's Republic of China and engaging in investment in the equity of enterprises that are not publicly traded, and promoting the compliant development of equity investment enterprises, we hereby notify you on relevant matters as follows:

1. Regulating the establishment of, the raising of capital by, and the investment sector of, equity investment enterprises

(1) Establishment and mode of administration

Equity investment enterprises shall be established in compliance with relevant provisions of the PRC Company Law (中华人民共和国公司法) and the PRC Partnership Law. An equity investment enterprise established in the form of a limited liability company or company limited by shares may manage itself through the establishment of an internal management team or, alternatively, opt for an entrusted management arrangement whereby it entrusts the management of its assets to another equity investment enterprise or equity investment management enterprise.

(2) Raising of capital

The capital of an equity investment enterprise may only be raised privately from specific qualified investors that have risk identification capabilities and risk-bearing capabilities. Direct or indirect promotion to non-specific or non-qualified investors through the media (including all types of websites), publication of announcements, putting up of notices in the community, distribution of brochures to the public, transmission of text messages to the public or the holding of seminars, lectures or other public or disguised public means (including making prospectuses available at the counters of institutions such as commercial banks, securities companies, and trust and investment corporations) is prohibited. The parties responsible for raising capital for an equity investment enterprise must fully disclose to investors the investment risks and the potential investment losses and may not guarantee investors that they will recover their investment principal or obtain fixed returns.

(3) Capital subscription

Investors of an equity investment enterprise may subscribe for their capital contributions only with their own lawful monetary funds. The payment of capital may be done under a commitment system: i.e. at the capital raising stage of the equity investment enterprise, the investors sign a subscription undertaking, and at the stage of conducting the investment operations of the equity investment enterprise, the investors pay in their capital contributions in instalments in accordance with the articles of association or partnership agreement of the equity investment enterprise.

(4) Limitation on the number of investors

The number of investors of an equity investment enterprise shall comply with the PRC Company Law(中华人民共和国公司法) and the PRC Partnership Law. If an investor is a pooled fund trust, partnership or other such organisation without legal personality, efforts shall be made to check whether the final natural person(s) and/or legal person(s) is/are (a) qualified investor(s) and to calculate the total number of investors, unless the investor is an equity investment fund of funds.

(5) Investment sector

Equity investment enterprises are limited to investing in non-publicly traded equity, and idle funds may only be deposited in banks or used to purchase sovereign bonds or other such fixed-return investment products. The investment orientation shall comply with the state's industrial policy, investment policy and macroeconomic policy. The compliance management procedure for fixed asset investment projects must be carried out for projects invested in by an equity investment enterprise. When a foreign-invested equity investment enterprise proposes to make an investment, it shall carry out the check and approval procedures for the investment project in accordance with relevant state provisions.

2. Enhancing the risk-control mechanisms of equity investment enterprises

(6) Control of investment risks

The application of funds by an equity investment enterprise shall be carried out in accordance with the enterprise's articles of association or partnership agreement, and investments shall be rationally diversified so as to reduce investment risks. An equity investment enterprise may not provide security for an enterprise other than an investee enterprise. With respect to investments in affiliated persons, an equity investment enterprise shall implement a system of avoidance of affiliated persons in its investment decision-making and provide for the same in its articles of association or partnership agreement and entrusted management agreement and custody agreement. The criteria for determining what constitutes an affiliated person shall be determined, in accordance with relevant laws and statutes, by the investors of the equity investment enterprise and specified in the equity investment enterprise's articles of association or partnership agreement and entrusted management agreement and custody agreement.

(7) Incentive and constraint mechanisms

The articles of association, partnership agreement or other such legal document of an equity investment enterprise and its entrusted management organisation shall provide for a performance incentive mechanism and risk constraint mechanism and specify the decision-making procedure for relevant investment operations. An equity investment enterprise may specify its term of existence.

(8) Inspection and assessment of entrusted management

An equity investment enterprise may, pursuant to relevant provisions of the entrusted management agreement or other such legal document, inspect and assess on a regular or ad hoc basis the investment operations carried out by its entrusted management organisation using its capital.

(9) Asset custody

The assets of an equity investment enterprise shall be placed in the custody of an independent custodian. However, such custody may be bypassed with the unanimous consent of all of the investors. If the entrusted management organisation is wholly foreign-owned or a Sino-foreign equity joint venture, the assets of the equity investment enterprise shall be placed in the custody of an independent domestic custodian with legal personality.

3. Clarification of the basic duties of an equity investment management institution

(10) Duties of an entrusted management organisation

If an equity investment enterprise opts for an entrusted management arrangement, the entrusted management organisation shall perform the following duties in accordance with the entrusted management agreement: (i) formulating and implementing investment plans and effecting post-investment management of the investee enterprises; (ii) actively taking part in formulating the development strategies of, and providing value-added services to, the investee enterprises; (iii) disclosing to the equity investment enterprise on a regular or ad hoc basis information on the business operations, etc. of the equity investment enterprise; preparing accounting statements on a regular basis and, after auditing by an external auditor, submitting them to the equity investment enterprise; and (iv) other duties specified in the entrusted management agreement.

(11) Restrictions on conflicts of interest

An entrusted management organisation shall treat the property of different equity investment enterprises under its management in an equitable manner, and may not use the property of an equity investment enterprise to seek benefits for a third party other than the equity investment enterprise. It shall open a separate account for each different equity investment enterprise, and manage each account separately.

(12) Resignation by an entrusted management organisation

The entrusted management organisation of an equity investment enterprise shall resign if: (i) the entrusted management organisation is dissolved, goes bankrupt or goes into receivership; (ii) the entrusted management organisation loses its management capabilities or materially harms the interests of the investors of the equity investment enterprise; (iii) pursuant to the entrusted management agreement, (an) investor(s) holding a certain percentage or more of the equity of the equity investment enterprise request(s) that the entrusted management organisation resign; or (iv) another circumstance arises under which the entrusted management organisation is required to resign as specified in the entrusted management agreement.

4. Establishment of an information disclosure system for equity investment enterprises

(13) Submission of annual reports

An equity investment enterprise, in addition to disclosing investment operation information to its investors in accordance with its articles of association or partnership agreement, shall, within four months after the end of each financial year, submit to the record filing department an annual business report and its annual financial report audited by an accounting firm. The entrusted management organisation and custodian of an equity investment enterprise shall, within four months after the end of each financial year, submit to the record filing department an annual asset management report and an annual asset custody report.

(14) Prompt reporting of material events

If any of the following material events occurs in the course of the investment operations of an equity investment enterprise, it shall report the same to the record filing department within 10 working days: (i) amendment of documents such as the articles of association or partnership agreement of the equity investment enterprise or its entrusted management organisation, the entrusted management agreement, etc.; (ii) the equity investment enterprise or its entrusted management organisation increases or reduces its capital or seeks debt-type financing from a third party; (iii) the equity investment enterprise or its entrusted management organisation divides or merges; (iv) there is a change in the entrusted management organisation or custodian, including a change in the senior management personnel of the entrusted management organisation or other such material change; or (v) the equity investment enterprise is dissolved, goes bankrupt or goes into receivership.

5. Strengthening the record filing administration and industry self-regulation of equity investment enterprises

(15) Scope of record filing administration

Except in the circumstances set forth below, an equity investment enterprise shall, in accordance with the requirements hereof, apply for record filing to the relevant administrative department within one month after completing business registration: (i) it has completed the procedures for record filing as a venture investment enterprise in accordance with the Tentative Measures for the Administration of Venture Investment Enterprises; or (ii) its entire capital contribution was made and it was established by a single entity or natural person, or it was jointly invested in and established by a single entity with its wholly-owned subsidiary or jointly invested in and established by several wholly-owned subsidiaries of one entity.

(16) Incidental Record filing of Entrusted Management Organisations

If an equity investment enterprise has, through an entrusted management arrangement, entrusted management of its assets to another equity investment enterprise or an equity investment management enterprise, its entrusted management organisation shall apply for incidental record filing and subject itself to record filing administration.

(17) Record filing department

An equity investment enterprise with capital (including both the actual capital contributions of investors and capital contributions that have been committed to but not actually paid in) of at least Rmb500 million or the equivalent in a foreign currency shall carry out record filing procedures with the National Development and Reform Commission (the State Record Filing Department); an equity investment enterprise with capital of less than Rmb500 million or the equivalent in a foreign currency shall carry out record filing procedures with the record filing department determined by the provincial-level people's government (the Provincial-level Record Filing Department).

(18) Entity applying for record filing

If an equity investment enterprise manages itself, it shall be responsible for carrying out the application procedures for record filing; if an equity investment enterprise has opted for an entrusted management arrangement, its entrusted management organisation shall be responsible for carrying out the application procedures for record filing.

(19) Procedure for applying for record filing to the state record filing department

When an equity investment enterprise applies to the State Record Filing Department for record filing, the applying entity shall submit the relevant record filing materials to the Provincial-level Record Filing Department of the place where the equity investment enterprise is located for preliminary review. If the Provincial-level Record Filing Department confirms that the application documents and materials are all in order, it shall, within 20 working days after receipt of the equity investment enterprise's record filing application, issue its preliminary review opinion to the State Record Filing Department. Within 20 working days after receipt of the equity investment enterprise's record filing application and preliminary review opinion forwarded by the Provincial-level Record Filing Department, the State Record Filing Department shall complete the record filing procedures for the equity investment enterprise, provided that no objections were found after checking, by posting the name list of such equity investment enterprises and their basic particulars on its web portal.

(20) Procedure for applying for record filing to the provincial-level record filing department

When an equity investment enterprise applies for record filing to the Provincial-level Record Filing Department of the place where it is located, the Provincial-level Record Filing Department shall, within 20 working days after receipt of the equity investment enterprise's record filing application, complete its record filing procedures, provided that no objections were found after checking, by posting the name list of such equity investment enterprises and their basic particulars on its web portal.

(21) Documents and materials to be submitted when applying for record filing of an equity investment enterprise

When an equity investment enterprise applies for record filing, it shall submit the following documents and materials: (i) a written record filing application of an equity investment enterprise; (ii) a photocopy of its business licence; (iii) its prospectus; (iv) its articles of association or partnership agreement; (v) the capital subscription undertaking signed by all of the investors; (vi) a capital verification report issued by a capital verification institution in respect of the capital contributions actually made by all of the investors; (vii) an account by the promoter(s) as to whether the capital raising by the equity investment enterprise is lawful and compliant; (viii) the résumés and credentials of the equity investment enterprise's senior management personnel; (ix) the custody agreement, or, if all of the investors have agreed to bypass custody, a letter jointly signed by all of the investors to the effect that they consent to bypassing custody; and (x) a legal opinion on the record filing documents and materials issued by a law firm. If an equity investment enterprise has opted for entrusted management, the entrusted management agreement executed by the equity investment enterprise and the entrusted management organisation shall additionally be provided.

(22) Documents and materials to be submitted when applying for incidental record filing of the entrusted management organisation of an equity investment enterprise

When the entrusted management organisation of an equity investment enterprise applies for incidental record filing, it shall submit the following documents and materials: (i) a photocopy of its business licence; (ii) its articles of association or partnership agreement; (iii) a list of its shareholders (partners) and a description thereof; (iv) the résumés and credentials of all of its senior management personnel; and (v) a description and the performance of its equity investment management business.

(23) Definition of, and requirements in respect of, senior management personnel

For the purposes of this Circular, the term “senior management personnel” means, in the case of an enterprise organised as a company, its directors, supervisors, manager, deputy managers, financial controller, board secretary and other persons specified in its articles of association, or, in the case of an enterprise organised as a partnership, its general partners and other persons specified in its partnership agreement. If a general partner of an enterprise organised in the form of a partnership is a legal person or an organisation without legal personality, its senior management personnel shall also be deemed senior management personnel of the enterprise. All of the senior management personnel of an equity investment enterprise and its entrusted management organisation shall not have a record of violations of the law during the most recent five years or be involved in a material economic dispute case that is pending, and at least three members of the senior management personnel shall have at least two years of experience in equity investment or related business.

(24) Application for cancellation of record filing

An equity investment enterprise may apply for cancellation of its record filing if: (i) it is dissolved; (ii) its main business ceases to be the equity investment business; or (iii) it separately carries out procedures for record filing as a venture investment enterprise in accordance with the Tentative Measures for the Administration of Venture Investment Enterprises.

(25) Oversight

A record filing department shall strengthen its oversight of equity investment enterprises through the establishment and enhancement of systems such as an equity investment enterprise record filing administration information system, reporting by the public, regular or ad hoc inspections and making of public announcements. It shall conduct annual inspections to determine whether equity investment enterprises and their entrusted management organisations that have their records filed have complied with relevant provisions of this Circular within five months after the end of each financial year. When necessary, it may apprise itself of their operating and management situation through means such as correspondence, telephone inquiries, visits, onsite inspections and offsite inspections.

(26) Penalties for the circumvention of oversight effected through record filing

If a record filing department discovers that an equity investment enterprise or its entrusted management organisation has failed to carry out record filing, it shall cause such equity investment enterprise or entrusted management organisation to carry out record filing procedures with the department within 20 working days; if the equity investment enterprise or entrusted management organisation fails to do so, it shall be classified as an “equity investment enterprise that circumvents oversight effected through record filing” or an “entrusted management organisation that circumvents oversight effected through record filing” and the same shall be publicly announced on the record filing department's web portal.

(27) Penalties for non-compliant operation

If an equity investment enterprise's or its entrusted management organisation's operations and/or management fail to comply herewith, it shall be required to rectify the matter within six months; if it fails to do so, it shall be classified as an “equity investment enterprise whose operations/management are non-compliant” or an “entrusted management organisation whose operations/management are non-compliant” and the same shall be publicly announced on the record filing department's web portal.

(28) Industry self-regulation

A national equity investment industry association shall be established that is responsible for the self-regulation of equity investment enterprises and their entrusted management organisations in accordance with relevant laws, regulations and this Circular.

(29) Implementation

This Circular shall be effective as of the date of issuance. Equity investment enterprises and their entrusted management organisations established before the implementation of this Circular shall carry out record filing with the record filing department in accordance with the relevant provisions hereof within three months after the issuance of this Circular. If the investment operations of such equity investment enterprise or its entrusted management organisation are not in compliance herewith, it shall carry out rectification in accordance with the relevant provisions hereof within six months after the issuance of this Circular.