Interpretation of Key Points:
1. The object of the Regulation
Article 2: This Regulation shall apply to the investment activities within the territory of the People's Republic of China for the interests of investors by privately raising funds for the establishment of investment funds or the establishment of companies and partnerships pursuant to the law for the purpose of carrying out investment activities that are managed by privately investment fund managers or general partners.
The “private funds” regulated by the Regulations not only cover private securities investment funds, but also include private equity investment funds and venture capital funds.
2. Clarify the types of private fund managers and strengthen the norms for general partners
Article 7: A private investment fund manager shall be a legally established corporation or partnership. If the assets of a private investment fund established in the form of a partnership are managed by the general partner, the provisions of this Regulation concerning private investment fund managers shall apply to the general partner.
Article 7 specifies that the types of private fund managers only include companies and partnerships. Meanwhile, for partnership private funds, where the identity of the general partner ("GP") and the private fund manager materially overlaps, the GP shall apply the relevant provisions of the Private Fund manager in the Regulation. Therefore, for partnership private funds, if GP manages the fund assets without obtaining the registration and filing of the private fund manager, it will face the risk of verification and even administrative punishment in the future. In addition, the GP managing the assets of the private fund is required to perform the duties and obligations of the manager. The shareholders, actual controllers, partners and executives of the GP should also meet certain qualification requirements in accordance with the provisions, and there should be no corresponding prohibited behaviour.
3. In principle, private investment fund managers shall raise funds on their own
Article 17: A private investment fund manager shall raise funds on its own, and not entrust others to raise funds, unless otherwise provided by the securities regulator under the State Council.
We believe that this provision does not completely negate the consignment sale model. It should be understood as an encouragement for private funds to carry out direct sales while also allowing space for securities regulators to set rules on consignment sales. In the future, there may be relevant implementation rules that provide clear provisions on the consignment sale of private funds.
4. Prohibition on using private investment fund for lending business
Article 24: The investment activities of a private investment fund include the trading of shares of a joint stock company, equities of a limited liability company, bonds, fund shares, other securities and derivatives thereof, as well as other investment objects that comply with the regulations of the securities regulator under the State Council. The property of a private investment fund shall not be used for carrying out interbank lending or loan businesses or doing so in any disguised form. A private investment fund manager shall not increase the implicit government debt in a disguised form by requiring the local government to make a commitment to repurchase the principal or by any other means.
The Regulation specifically prohibits the private investment fund from being used as "debt disguised as equity", and further emphasises that the hidden debt of the government shall not be increased in disguise.
5. New nested exemption rules for parent funds
Article 25: The investment level of a private investment fund shall comply with the provisions of the financial regulator under the State Council. However, if a private investment fund meets the conditions prescribed by the securities regulator under the State Council and invests its main fund property in other private investment funds, it is not included at the investment level. The investment levels of venture capital funds and private investment funds specified in Paragraph 2 of Article 5 hereof shall be stipulated by the relevant departments under the State Council.
Article 25 of the Regulation clarifies that it should also comply with the provisions stipulated by the financial management department under the State Council on nesting. This means adhering to the requirements of the Guiding Opinions on two layers of nesting, which state that "asset management products can be reinvested in one layer of asset management products, but the invested asset management products shall not be reinvested in asset management products other than public securities investment funds." However, the Regulation also considers the practices of the private fund industry and provides an exemption for FOF (fund of funds) type private funds. These are private funds whose main fund assets are invested in other private funds and are not included in the investment level.
6. Establish an investment declaration, registration, review and disposal system for employees
Article 26: A private investment fund manager shall, under the principle of specialised management, hire senior executives with corresponding practice experience to take charge of investment management, risk control, compliance and other work. The private investment fund manager shall, under the principle of investor interests as priority, establish a management system for the declaration, registration, review and disposal of investments by practitioners, to prevent tunneling and conflict of interests.
Article 26 of the Regulation further requires the investment reporting system to cover the entire process of reporting, registration, review, disposal, etc., and that the scope of reporting is not limited to securities.
7. Management system for related parties’ transaction
Article 28: A private investment fund manager shall establish a sound affiliated transaction management system and shall not carry out improper transactions or tunneling with affiliated parties by using its private investment fund property or conceal relevant information through multi-level nesting or by other means.
Where a privately-offered fund manager utilises the privately-offered fund property to carry out transactions with itself, investors, other privately-offered funds managed by it, or privately-offered funds managed by other privately-offered fund managers controlled by its actual controller, or other entities with significant interest relationship, it shall perform the decision-making procedures agreed in the fund contract and provide the relevant information to the investors and privately-offered fund custodians in a timely manner.
8. Mandatory audit requirement
Article 29: A private investment fund manager shall, as required, engage an accounting firm to audit its privately offered fund property, provide investors with the audit results and submit the same to the registration and record-filing agency.
Article 29 of the Regulation stipulates the audit requirements for private funds but does not limit the conditions applicable to the audit, such as the type of fund, the size of assets, or the number of investors.
9. Foreign-invested private equity fund manager
Article 61: The administrative measures for foreign-funded private investment fund managers shall be formulated by the securities regulator under the State Council together with the relevant departments, in accordance with laws and administrative regulations on foreign investment and the provisions hereof. Unless otherwise stipulated by the State, an overseas entity shall not raise funds from domestic investors directly to establish a private investment fund. A private investment fund manager carrying out private investment fund business activities overseas shall comply with the relevant state provisions.
According to Article 61 of the Regulation, the securities regulatory commission and the relevant departments under the State Council will further clarify issues such as the qualifications of foreign-invested private fund managers, access procedures, and operation management. However, the formulation of specific management methods in the subsequent period must still adhere to the relevant provisions of the Foreign Investment Law and this Regulation, and must not conflict with the relevant provisions of the Regulation.
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