China clarifies fund registration rules

The China Securities and Regulatory Commission (CSRC) released and implemented new rules for private equity funds in China concerning fundraising for Chinese investors. The new rules apply to domestic private equity, venture capital, funds of funds, hedge and debt funds, and are effective immediately.

The rules include specifications on reporting, saying that managers do not have to get prior approval for establishing a fund, but must register with the Asset Management Association of China (AMAC) once the fund is closed.

Restrictions have also been placed on fund marketing, with no public solicitation permitted, and funds only allowed to market to what would be considered a ‘qualified investor’.

“The importance of the rules is that they provide clarity to the definition of ‘qualified investors’ – basically to whom you can market your fund. Also, the ‘qualified investor’ criteria are actually lower than the standards of the [previous regulator] the NDRC,” said Serena Tan, associate at Debevoise & Plimpton.   

The rules outline the kinds of disclosure that investors may want to find in fund documents, such as investment activities, allocation of investment returns, fund expenses or conflicts of interests. Managers will also be required to report to AMAC material changes in the investment teams and investment activities of the private funds they manage.

“[Now], it is a little bit like the US where essentially you can offer whatever you want as long as your disclosure is complete and full. That’s why I think people applaud it because the CSRC is saying as long as you comply with the rules on ‘qualified investors’, no publicity and full disclosure, you are qualified to market a fund and we’re not going to second-guess that,” Debevoise partner Andrew Ostrognai added.

As the new regulator for private equity establishes itself as the sole authority for the industry, draft regulations in recent months have kept GPs in the dark about how exactly they will be regulated when establishing new funds. The new regulations, which came out and into effect on Friday, provide fund managers with defined rules for them to follow, something the industry has long been waiting for. 

“These rules do give clarity, they do not require prior licenses so sponsors can go out and raise money if their funds fall within these requirements, and generally the rules are fairly light-touch, frankly they seem much like the typical private placement rules we know and see in most jurisdictions.”

Venture capital firms are also expected to receive special treatment from the regulators, however more details are expected on the additional benefits at a later date, Tan explained.