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Abstract: Recently, the training course of “Quasi-LP Thinking Conference: 2017 Senior Seminar of Capital Investment and Governmental Industry Fund” organized by Beijing Venture Capital Innovation Service Alliance was held,which explained in detail how to give into play the role of government guiding fund in attracting local investment and developing local economy, promote innovation and start-up and accelerate the industrial transformation and upgrade as well as supply side reform. Beijing Venture Capital Innovation Service Alliance invited the front-line investors and experts to give lessons on site and answer questions for government guiding fund managers. Many senior executives from well-known investment institutions, industrial parks and industrial fund management companies attended.

Mr. Liu Guangchao, Founding Partner and Director of Beijing DOCVIT Law Firm and Secretary General of Green Legal Global Alliance, was invited to attend the conference and delivered a professional speech with the theme of Analysis on Guiding Fund Management Laws and Regulations and Prevention and Control of Risks. The following is summarized according to the training content:

increasingly improved central and local laws and regulations along with “rapid development of guiding funds”

From the perspective of development speed and scale, China’s government guiding funds have entered a rapid development stage since 2015. According to statistics, 297 new government guiding funds were set up in 2015 with a scale of RMB 1,508.996 billion, 2.83 times and 5.24 times the quantity and scale of guiding funds in 2014 respectively; till the end of 2016, 1013 government guiding funds had been set up with total target scale of RMB 5331.650 billion, in which RMB 1907.424 billion has been in place,

Functionally, the guiding funds may be summarized as: 1. Supporting innovation and start-up, and encouraging the start-up investment enterprises to invest in enterprises that are in the seed stage, start-up stage or other early start-up stages; 2. Supporting the industrial transformation and upgrade and development and industrialization of major and crucial techniques, guiding social capital to add input, fulfilling the industrial transformation and upgrade and major development, pushing forward the economic structure adjustment and optimized allocation of resources; 3. Supporting the development of SMEs, supporting the development of medium, small and micro-sized enterprises, improving the enterprise service environment and financing environment, promoting the enterprises’ start-up and innovation vitality, and adding the inherent momentum of sustainable economic development; 4. Supporting the infrastructure and public service fields, reforming the public service supply mechanism, innovating the public facility investment and financing modes, encouraging and guiding social capital to enter the infrastructure and public service fields, speeding up the construction of major infrastructure and improving the public service quality and level.

From the perspective of legislation, since 2005, at the central level, Interim Measures for the Administration of Start-up Investment Enterprises, Notice on Guiding Opinions Regarding the Normalized Establishment and Operation of Start-up Investment Guiding Funds, Interim Measures for the Administration of Start-up Investment Guiding Funds for Technological Small and Medium-sized Enterprises, Notice on the Division of Responsibilities in the Administration of Private Equity Funds, Interim Measures for the Supervision and Administration of Private Investment Funds, Interim Measures for the Administration of Government Investment Funds, Guiding Opinions Regarding Injecting Financial Funds into Government Investment Funds to Support Industrial Development, Interim Measures for the Administration of Government-funded Industrial Investment Funds and Guidelines for Credit Information Registration of Government-funded Industrial Investment Funds (provisional) were issued successively; locally, by taking Sichuan and Zhejiang as an example, on the basis of the above regulations, they released corresponding fund management procedure to normalize the operation of local guiding funds, and have basically established the operation principles and modes, investment modes and organization forms of guiding funds, and have formed gradually complete regulatory system. In the meantime, they stipulated in detail the fund establishment, investment objects, main investment fields, investment restriction, performance evaluation and credit system building and information disclosure, and fund operation has gradually become normalized.

“Government guidance, market-oriented operation” has gradually become the guideline for the operation of guiding funds.

At present, guiding funds consist of three major categories: 1. Start-up investment guiding funds; through supporting the development of start-up investment enterprises, social funds are guided to enter the start-up investment field. Funds are directly involved in the start-up investment business; 2. industrial investment guiding funds; social funds are guided to invest in the major fields and weak points developed by local advantageous leading industries so as to support their development; 3. Infrastructure investment guiding funds; by taking the major infrastructure construction as the focus, social funds are guided to participate in the investment of major municipal infrastructure projects so as to promote the infrastructure construction through specialized fund operation management. guiding fund management modes consist of self management and commissioned management; operation modes comprise equity participation, financing guarantee and follow-up investment. It shall pay attention to the following points in the operation of guiding funds:

First, government guidance and market-oriented operation. Government guiding funds shall be operated according to the market principles, and excessive administrative intervention should be avoided. In the meantime, it should prevent the “dominance by the state-owned shareholder exclusively” so as to give into play the capacity of guiding funds. Through establishing the guiding funds, the government can guide social funds to enter those hi-tech fields with high risks and high growth potential that the commercial funds would not like to enter; the orderly market behaviors are guaranteed through formulating policies and normalizing the market operation rules; the government shouldn’t intervene in the operation of start-up investment.

Second, accurately choosing the investment objects. The investment objects are usually those enterprises of high technology, new products, quick growth and great growth potential to which general investors or commercial banks would not like to provide funds; it should bear the investment risks to invest in these enterprises; rather than current profit or loss of invested objects, the capital investment objective lies in capital development prospect and appreciation in asset value so as to obtain the high return through listing or selling. In the meantime, it should note that the equity investment in enterprises doesn’t aim at the control thereof, and doesn’t participate in their product R&D, production operation and other activities, but indirectly supports their development and provides necessary value-added service.

Third, openness, fairness, impartiality and avoiding black box operation. It should be open, fair and impartial and avoid black case work, embezzlement and corruption at each stage of implementation of government guiding funds so as to give into play the using efficiency of government funds.

Fourth, selecting the appropriate exit mechanisms. The ultimate goal of government guiding funds is to how to guide more nongovernmental capital into the investment field. In terms of using the government guiding funds, it should well control the balance between acting according to the market economy law and not scrambling for benefits with “people” and primarily consider whether the demonstration effect and leverage can be given into play. Based on such understanding, when government guiding funds exit from the invested enterprises, the government shall not follow the principle of pursuing maximum profits. As for the condition of government exit, it shall be generally understood that the invested enterprises have been able to achieve sustainable profitability. government guiding funds may exit at one time or step by step.

“Using multiple means” to prevent legal risks in the operation of guiding funds

At present, there are 3 main contradictions in the operation of guiding funds: 1. Contradiction between social funds and financial funds, both of which differ in the risk tolerance and profit-making demand. Social funds usually take the achievement of maximum return on investment in the quickest speed as the ultimate goal, and can bear certain extent of risks. Financial funds usually don’t aim at profit-making; in terms of profit distribution and exit, they follow the principles of ensuring the security and offering profits to people, and are poor in risk tolerance. 2. Contradiction between leverage effect and guiding effect. The guiding effect is the most fundamental mission and initial intent of guiding funds. It is the inevitable choice and outcome of market mechanism. 3. Contradiction between rocketing scale and limited high-quality projects and exit channels.

From the perspective of legal risks, guiding funds confront the inventory risk, relevant risk generated by GP moral hazards, relevant risk arising from preference convergence, risk of violation, unsmooth exit risk, etc. To prevent and control the legal risks in the operation of guiding funds, it should start from the following aspects: 1. Enhancing the top-level design, and promoting the industrial focusing and layout; 2. Improving the market rules, and refining the regulatory rules and requirement; 3. Applying multiple means in GP selection, fund structure design and post-investment management, preventing and controlling the project management and operation risks; 4. Establishing the risk prevention and control system, fulfilling real-time and dynamic follow-up, regulation and control; 5. Developing the multi-level capital market, adding the exit ways of guiding funds.