A New Era for Private Investment Funds and their Managers in China

The New Private Fund Regulations

On 9 July 2023, China’s State Council officially issued the Regulations on the Supervision and Administration of Private Investment Funds (the Private Fund Regulations), which will come into effect on 1 September 2023. The Private Fund Regulations are the highest level of legislation issued specifically regulating private investment funds (the Private Funds) and have been waited for by the market since late 2017 when the draft was published for comment. 

By way of background, prior to these Private Fund Regulations taking effect, the Private Funds were regulated by the following laws and regulations: 

• the Securities Investment Fund Law, issued by the Standing Committee of the National People's Congress in 2003 (amended respectively in 2012 and 2015). This is a state law of higher legislative hierarchy than the Private Fund Regulations, which however only gives a “light touch” on Private Funds;
• the Interim Measures for the Supervision and Administration of Private Investment Funds, issued by the China Securities Regulation Commission (CSRC) in 2014. This is the first legislation governing Private Funds, though its level of legislative hierarchy is lower than the Private Fund Regulations;
• the Measures for the Registration and Record-Filing of Private Investment Funds issued by the Asset Management Association of China (AMAC), which came into effect from 1 May 2023 (the 2023 AMAC Rules) and replaced the previous trial version; and
• the various guidelines and Q&As in respect of registration and record-filing of Private Funds and their managers (the Private Fund Managers) issued by the AMAC.

The Private Fund Regulations have not introduced substantial changes to the existing regulatory regime for Private Funds. Instead, they reinstate and clarify, from a higher legislative hierarchy, the various existing rules and requirements and also principles and practices that have been well-recognised in various different levels of regulations and industrial guidelines under the current regime. Also, they set out the corresponding regulatory measures and enhanced liabilities in respect of any violations. We briefly summarize below some major points of the Private Fund Regulations. 

Definition of Private Funds

The Private Fund Regulations consolidate the definition of “Private Funds” which refer to the funds (a) raised and established within the territory of the PRC in a non-public manner; (b) which are established contractually (i.e. in the form of an investment fund), or in the form of a company or a partnership, (c) managed by Private Fund Managers (including general partners if Private Funds are established as partnerships), and (d) the aim of which is to make investments for the benefit of investors.  Private Funds are subject to the record-filing requirements of the AMAC.

Differentiated supervision system

The Private Fund Regulations confirm that the competent authority will adopt a “differentiated supervision” approach to supervise Private Fund Managers (depending on business types, scales of assets under management (AUM), compliance continuity, risk control status and customer service skills) and Private Funds (such as venture capital investment funds and securities investment funds). 

The Private Fund Regulations also provide that venture capital investment funds can enjoy certain statutory exemptions from the filing and inspection requirements of Private Funds. 

Recognition of AMAC registration/compliance requirements on Private Fund Managers

The Private Fund Regulations explicitly require Private Fund Managers to fulfil their obligations to register with the AMAC, and to comply continuously with the Capital Requirement and Designated Personnel Obligations (both defined below). 

Failure to satisfy the AMAC registration requirement will result in certain administrative penalties, including: (a) in respect of an entity, confiscation of illegal income, and a monetary fine up to five times of the illegal income (or if there is no illegal income, a fine up to RMB1 million); and (b) in respect of an individual being the person in charge of the breaching Private Fund Manager, a warning and a fine up to RMB300,000. 

Failure to comply continuously with the Capital Requirement and Designated Personnel Obligations will subject the breaching Private Fund Manager to penalties such as warning, official criticism, a monetary fine of up to RMB1 million, or even business suspension/cessation, and subject the person directly responsible to a monetary penalty up to RMB300,000 fine. 

Exemption on the multi-layer investment restriction 

Since the issuance of the Asset Management Guidelines by the CSRC and other regulatory authorities in 2018, it has been legally confirmed that an asset management product is only permitted to be invested into one additional layer of another asset management product, i.e. multi-layer (>2) investment structures are prohibited.  This effectively restricts the channel services in the financial sector - please refer to our previous publication on the Asset Management Guidelines.

However, the market has been taking a common view in practice that Private Funds should be exempted from the above multi-layer investment restriction. The Private Fund Regulations have formally responded to this practice, by stating that Private Funds whose major fund assets are invested into other Private Funds, will not be deemed as multi-layer investment. In the official Q&As published together with the Private Fund Regulations, the spokesman explained that this exemption is to specifically support “the reasonable business development needs of fund of funds, venture capital funds and governmental funds.”     

Cross-border activities of foreign-invested Private Fund Managers (the FIE Managers)

The Private Fund Regulations broadly apply to the FIE Managers as well, but state that further detailed rules (such as requirements on the FIE Managers who are securities investment fund managers) shall be formulated separately. 

Also, the Private Fund Regulations re-emphasize the general prohibition on overseas institutions’ direct fundraising from PRC domestic investors, though according to market observations, it is likely that this may be liberalised.

The 2023 AMAC Rules

On 24 February 2023, the AMAC issued the 2023 AMAC Rules, which came into effect on 1 May 2023. The 2023 AMAC Rules provide detailed requirements (to replace old ones) with respect to the registration of the Private Fund Managers and the filing of Private Funds. Along with the 2023 AMAC Rules, the AMAC also issued three supporting guidelines to further clarify details regarding the registration of Private Fund Managers. It is expected that the AMAC may also issue relevant guidelines on the filing of Private Funds in the future. 

As a general overview, the aim of the 2023 AMAC Rules is to make the existing requirements more consolidated and systemic. The 2023 AMAC Rules particularly enhance the following major requirements on the registration of Private Fund Managers:

• unless otherwise prescribed, the Private Fund Manager’s registered capital (being not less than RMB10 million or equivalent amount in other freely convertible currencies) shall be contributed in full (the Capital Requirement);
• the Private Fund Manager shall not have large receivables or payables owing to it;
• any single asset management product shall not hold 25% or more equity or property interest in a Private Fund Manager, and the total direct or indirect investment(s) made by the asset management product in a Private Fund Manager shall not exceed 25%;
• unless otherwise prescribed, designated senior management personnel (such as the legal representative, managing partner or its appointed representative, and senior investment executive officer) of a Private Fund Manager shall: 
  •  (each (directly or indirectly) hold a certain proportion of the equity/property interest in the Private Fund Manager; and 
  •  collectively contribute the paid-in capital of no less than 20% in the total paid-in capital of the Private Fund Manager, or of RMB2 million (or equivalent amount in other freely convertible currency) (the Designated Personnel Obligations); 
• unless otherwise prescribed, each of the controlling shareholder, the general partner of a Private Fund Manager and the actual controller of the Private Fund Manager is subject to a three-year lock-up period in terms of their respective equity or property interest held;
• unless otherwise provided under the 2023 AMAC Rules, the minimum size of a Private Fund shall be RMB10 million; and
• if there is any change of control of a Private Fund Manager, the AUM of such Private Fund Manager shall be no less than RMB30 million in the 12 months prior to such change of control.

To facilitate a smooth transition from the previous rules, the 2023 AMAC Rules also provide for the following transitional period arrangements:

• the registration, filing, information change etc. of prescribed matters (the Relevant Matters) submitted before the effective date of the 2023 AMAC Rules shall be processed by the AMAC in accordance with the previous rules; and
• the Relevant Matters submitted prior to the effectiveness (i.e. 1 May 2023) of the 2023 AMAC Rules whose AMAC process has not completed on or after 1 May 2023 shall be processed by the AMAC in accordance with the 2023 AMAC Rules.

According to official data as of May 2023, there have been 22,000 Private Fund Managers registered with the AMAC, managing 153,000 Private Funds with total AUM amounting to RMB21 trillion. Regulators in China have recognised that Private Funds have played an important and positive role in supporting the real economy and so need to be regulated orderly and properly. 

The issuance of the Private Fund Regulations and 2023 AMAC Rules have finally standardised the market practice of Private Funds and Private Fund Managers from a legislative perspective. It is advisable for Private Fund Managers to consider the regulations carefully and to seek professional assistance to make sure they are in compliance with these new requirements and are conscious of the relevant legal consequences in case of any violation.