PRC private fund regulatory regime: reflections on 2012 



2012 was a remarkable year for the private fund regulatory regime in China. Since May, the general investment industry has been swamped by dozens of regulations issued by various regulatory authorities, which have an impact on the private fund industry from varies aspects, including loosening regulatory restrictions, permitting the entrance of more competitors, regulating a new exit mechanism, etc. Then, the promulgation of the new Law of Securities Investment Funds (New SIF Law) by the National People’s Congress of China on 28 December 2012, provided a fitting finale to the busy year. It also served as a prelude to the promulgation of more rules and regulations in 2013.

New SIF law: private SIFs

Without a doubt, the highlight of the year is the promulgation of the New SIF Law, which will go into effect on 1 June 2013. For the first time, it regulates certain private funds in addition to public funds. It also hammers out the binary structure of the private fund regulatory system: private funds which are offered to 200 or fewer qualified investors and which trade in publicly offered securities and derivatives (Private SIFs) will be regulated under the New SIF Law and supervised by the China Securities Regulatory Commission (CSRC); whilst private funds generally investing in shares of unlisted companies (PEs) falls outside the scope of the New SIF Law.

The New SIF Law establishes a Private SIF filing mechanism. Each Private SIF manager should register with the Asset Management Association of China (AMAC). It should also file with AMAC the Private SIF under its management immediately after the completion of the fundraising of such fund. The CSRC published two consultation drafts in February 2013, setting out the criteria and procedure for such registration and filing. It is expected that the new rules will be promulgated before the New SIF Law comes into effect (i.e., 1 June 2013).

The New SIF Law also brings the concept of fiduciary duties into the Private SIF regulatory regime. The CSRC is authorised to formulate rules governing the Private SIF managers in accordance with the principles of fiduciary duties applicable to public fund managers. Hence, in the foreseeable future, the fiduciary duties applicable to fund managers of public funds may, at least to some extent, apply to Private SIF managers.

The New SIF Law allowsPrivate SIF managers to manage public funds if the Private SIFmanager satisfies certain qualification requirements and obtains approval from the CSRC. Theimplementation rule relevant to this aspect has been published by the CSRC in February 2013.

NDRC and MOFOM regulations: PE regulatory regime

As mentioned above, the New SIF Law does not apply to entities investing in shares of unlisted companies. Such entities are still regulated under the PE regulatory regime and supervised by the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM), if any foreign capital is involved.

The PE regulatory regime consists of a series of rules and regulations governing ‘equity investment entities’ and ‘start-up investment entities’, which were issued by various national or local authorities since 2003. Under the PE regulatory regime, a PE fund may be established in the form of a corporation or a partnership. No matter which structure is taken, the PE fund must register with NDRC. Each investor of a domestic PE fund must contribute at least RMB 1m to the fund. If any foreign investor is involved, the formation of such a foreign invested fund is subject to approval by MOFCOM; and each investor must contribute at least US$1m unless the investor is recognised as an ‘indispensable investor’ under PRC law. An ‘indispensable investor’ is an entity or individual who satisfies certain statutory criteria. For example, in a partnership-structure PE fund, the ‘indispensable investor’ shall bear joint liability for the debts of such fund.

In past years, the term ‘PE’ has been abused and in many cases became a shell for illegal fundraising. A series of rules and circulars issued by NDRC in 2012 (and early 2013) illustrated the authority’s intention to tighten the administration of private equity funds. Whilst previously only PE funds with an investment capital of over RMB 500m were subject to the NDRC registration requirement, the circular issued in March 2013 requires PE funds with an investment capital of more than RMB 100m but less than RMB 500m to be registered with the relevant provincial branch of NDRC, and PE funds with an investment capital of over RMB 500m to be registered with NDRC. These circulars also reiterate that PE funds can only invest in shares that are not publicly traded and their spare capital can only be deposited in a bank account or be used to invest in fixed-income investment products such as national debt. PE firms are prohibited from forming or managing securities investment funds, or investing in financial derivatives, or carrying out money lending activities.

With respect toforeign invested RMB funds, an important guidance came in April 2012 by NDRC to its Shanghai branch in response to the Shanghai Branch’s request to clarify the domestic fund status of an RMB fund whose general partner is a PRC subsidiary of The Blackstone Group. NDRC stated that even though the general partner of an RMB fund had contributed a limited amount of foreign capital to the fund, the fund should still be deemed a foreign investor, and therefore should observe the foreign investment restrictions under PRC law when making portfolio investments.

More competitors are rushing into PE business

In 2012, another significant change to the PE industry was the diversification of the market. Many financial institutions are allowed to share a slice of the cake from the booming PE market, as outlined below:

Public fund managers.In September 2012, CSRC issued the pilot rules allowing public fund managers to offer special asset management plans to ‘qualified special customers’ and to use the capital in such special asset management plans to invest in non-publicly traded equities, bonds and other proprietary rights.

Considering the solid client base and the investment management experience of public fund managers, analysts expected that the public fund managers’ participation could have a significant impact on the PE market.

Securities companies.In October 2012, CSRC issued two regulations which allow securities companies to, through their direct-investment subsidiaries (which are investment vehicles of such securities companies, approved by CSRC to engage in direct equity investment activities), form and manage equity investment funds, start-up investment funds, M&A funds and mezzanine funds, as well as funds of funds.

Insurance companies.The China Insurance Regulatory Commission published a series of regulations in 2012 to expand the investment scope of insurance proceeds. Among other rules, insurance companies are allowed to diversify their overseas investments into currency market instruments, fixed-income instruments, publicly traded securities, equities in private companies, real estate, securities investment funds, PE funds and real estate investment trusts. Direct equity investments in private companies are limited to entities in limited industries, including the finance, old-age care, medical services, energy, resources, automobile services or modern agriculture industries.

PE secondary market

In June 2012, Beijing Financial Assets Exchange (BFAE), China Beijing Equity Exchange, China Association of Private Equity and China Beijing Stock Register & Custody Center established the China PE Secondary Market Development Union (Union) and issued the amended PE secondary market trading rules.The PE secondary market was launched by BFAE in 2010 as a platform for PE firms to trade shares of non-listed companies and for investors to trade the fund interests they hold in PE funds. The establishment of the Union signalled the systematisation and regularisation of the PE secondary market and therefore has important bearing for improving exit channels and increasing asset liquidity for PE funds.


Lorna Xin Chen is a partner and Yvonne Yuanyuan Cheng is an associate at Shearman & Sterling LLP. Ms Chen can be contacted on +852 2978 8001 or by email: Ms Cheng can be contacted on +86 10 5922 8016 or by email: 

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Lorna Xin Chen and Yvonne Yuanyuan Cheng

Shearman & Sterling LLP

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