Linklaters

On 23 November 2011, in the most recent step in the development of the regulatory regime applicable to private equity funds raised in the PRC, the General Office of the National Development and Reform Commission (the “NDRC”) for the first time issued rules on equity investment enterprises which apply nationwide. Most of the requirements track those specified in the Circular Regarding Further Regulating the Development and Filing Administration Work for Equity Investment Enterprises in Pilot Territories issued by the General Office of the NDRC dated 31 January 2011, which were applicable in Beijing, Tianjin, Shanghai, Jiangsu, Zhejiang and Hubei only (“Pilot Rules”) (please refer to Linklaters Alert dated 25 February 2011).The new rules are applicable to equity investment enterprises (namely private equity funds) established in the PRC and have no impact on offshore private equity funds raised for the purpose of investing in PRC companies.

Five key developments are worth highlighting:

• Filing requirements for all equity investment enterprises – while the Pilot Rules only require equity investment enterprises with capital commitment of RMB 500 million (or its equivalent) or more to complete a filing, the new rules impose filing requirements on all equity investment enterprises. Specifically, equity investment enterprises with capital commitment over the RMB 500 million threshold are required to file with the NDRC, and those with a lower capital commitment need to file with the authorities determined by the provincial governments. The new rules retain the following two exemptions from the filing requirement:
1. venture capital enterprises which have already completed a filing with the NDRC; and
2. enterprises established by a single entity or individual or by entities that are part of the same wholly-owned corporate group;

·         “Look-through” examination on non-legal person investors – the Pilot Rules were silent on the maximum number of investors for an equity investment enterprise, but the new rules expressly state that equity investment enterprises must abide by the relevant caps under the PRC Company Law and the Partnership Enterprise Law (i.e. maximum 50 investors for a limited liability company or a limited partnership, and maximum 200 investors for a company limited by shares). Further, in the case of a non-legal person investor such as a collective capital trust or a partnership enterprise, its ultimate investors will be counted towards the numerical limit unless the investor is a fund of funds (“FOF”) (see details in the paragraph below) and each of these investors (whether PRC or non-PRC individuals or institutions) is required to be a qualified investor who is capable of identifying and bearing risks;

·         FOFs falling within the purview of the new rules – the new rules make it clear that the establishment and operation of FOFs also need to comply with the new rules (including the look-through examination in relation to the qualified investor status of its investors). However, if a FOF which satisfies specified conditions acts as a non-legal person investor in another private equity fund, the FOF will be counted as a single investor;

·         Requirement to appoint independent custodians – under the Pilot Rules, if the investment advisor is a foreign invested enterprise, an onshore custodian will need to be appointed to keep custody of the assets of the equity investment enterprises. Further to this requirement, the new rules require that all equity investment enterprises need to appoint custodians to keep custody of their assets, unless otherwise unanimously agreed upon by all investors; and

·         Qualifications of senior management personnel – while the Pilot Rules are silent on the qualifications of senior management personnel of an equity investment enterprise, the new rules state that senior management personnel of an equity investment enterprise and its investment advisor must have no record of violation of law in the past five years and have not been involved in any ongoing material commercial dispute, and at least three senior management personnel must have more than two years’ experience in equity investment or related businesses.

Reference: Circular on the Promotion of the Standardised Development of Equity Investment Enterprises (《关于促进股权投资企业规范发展的通知》)
Issuing authority: The General Office of the National Development and Reform Commission