Professional Interpretation

Abstract: Due to the exclusion application of The New Regulations on Asset Management, the venture capital funds and the government industry funds have been in the state of no scope, no system and no regulation for a long time. With the introduction of The Notice, the venture capital funds and the government industry funds are vindicated for the first time in the private equity fund investment, and the parent funds of venture capital will usher in spring. In this article, the influence of The Notice on the capital contribution made by the financial institution LPs will be mainly interpreted, and on the basis of the analysis on The New Regulations on Asset Management, the application and special key points of The Notice will be sorted. 

On October 19, National Development and Reform Commission, People’s Bank of China, Ministry of Finance, China Banking and Insurance Regulatory Commission and China Securities Regulatory Commission jointly released The Notice on the Relevant Matters of Further Specifying the Investment of Asset Management Products of Financial Institutions in the Venture Capital Funds and the Government-funded Industry Investment Funds (FGCJG [2019] No. 1638, hereafter referred to as The Notice), and it specified “the venture capital funds” and “the government-funded industry investment funds” (hereafter referred to as “two kinds of funds”) and focused on adjusting the problems, such as continued investment, affirmation of qualified investors, nested layer exemption and regulatory subjects of the financial institutions’ investment in the venture capital funds and the government-funded industry investment funds. The release of The Notice is the implementation of the requirements for separately formulating the provisions related to “two kinds of funds” in The Guiding Opinions on Regulating the Asset Management Business of Financial Institutions (YF [2018] No. 106, hereafter referred to as The New Regulations on Asset Management and is the further specification of the investment of the asset management products of the financial institutions in “two kind of funds” in The New Regulations on Asset Management. The Notice has specified the application of “two kinds of funds” and their relationships with The New Regulations on Asset Management and its implementation rules and has put forward the new requirements for the investment, operation and regulations of “two kinds of funds”. In essence, it is the continuation of The New Regulations on Asset Management, and its formulation thought and main content are consistent with the basic principles and value orientation of The New Regulations on Asset Management and its implementation rules. 

I. Closely follow The New Regulations, seek a way out for the continued capital contribution 

The Notice has specified the issues of the continued capital contribution of the financial institutions to the venture capital funds and the government-funded industry investment funds (hereafter referred to as “two kinds of funds”) invested by the asset management products of the financial institutions under the framework of The New Regulations on Asset Management. Before the introduction of The Notice, the investment and financing of “two kinds of funds” was in the state of legislative blank. According to the relevant provisions in The New Regulations on Asset Management, the public equity financing and private equity financing products issued by most financial institutions cannot invest in “two kinds of funds”, and only the private equity financing products of the asset management products issued by the financing subsidiaries can invest in “two kinds of funds”. The New Regulations has restricted the fund sources of “two kinds of funds” and hindered the development of the startups, and the introduction of The Notice has established the legal channel for the investment in “two kinds of funds”. That the financial institutions can allocate the financial resources through equity investment activity to invest in two kinds of funds referred to in The Notice has settled the issue of continued capital contribution of the financial institutions to “two kinds of funds” and has improved the investment system of the asset management products of the financial institutions on one hand. On the other hand, it can provide the enterprises in different industries, in different scales and in different development stages with the suitable risk capitals, accumulate the indispensable capital funds for the high-quality development and provide the key support for the development of innovative enterprises. 

II. Continue The New Regulations, affirm the identity of qualified investors 

In April 2018, The New Regulations on Asset Management jointly released by People’s Bank of China, China Banking and Insurance Regulatory Commission and China Securities Regulatory Commission clearly stipulated the standards for affirming the “qualified investors”. To that moment, the standards for affirming the “qualified investors” were basically unified; however, the application scope of The New Regulations on Asset Management clearly excluded the venture capital funds and the government-funded industry investment funds, so the affirmation of the identity of qualified investors of “two kinds of funds” was not clearly stipulated. With the introduction of The Notice, the problems of the premises and standards for affirming the qualified investors of “two kinds of funds” have been settled. The Notice points out that: “The management institutions shall strengthen the management of investor appropriateness, and in the premise of fully disclosing and prompting the investment nature and investment risks of products to the investors, they can regard the whole of such products as qualified investors.” It is worth noting that this article will no longer apply the penetrating regulatory requirements for the upward identification of final investors in The New Regulations on Asset Management but require them to regard the whole of such products as qualified investors in turn. In other words, within the transitional period, there will be no violation as long as the number of SPVs investing in “two kinds of funds” + single qualified investors is not more than 200. The provisions on the qualified investors in The Notice have regulated the management of central investor appropriateness, have protected the legal rights and interests of the transaction parties, have reduced the overall risks of the market operation and have improved the investment system of the asset management products of the financial institutions. 

III. Relax the restrictions of The New Regulations, and exempt from the nested layer limit 

The New Regulations on Asset Management stipulates: The asset management products can invest in one more layer of asset management products but the asset management products in which they invest shall not invest in the asset management products other than the public equity securities investment funds again. The restrictive provisions on the nested layers have established the regulatory logistics of “one layer of nesting”. In the regulatory system of The New Regulations on Asset Management, the asset management products are only allowed to nest a layer of private equity funds; otherwise, they will not meet the regulatory requirements of The New Regulations on Asset Management; thus, the compliant nesting framework shall be “self-owned funds → asset management products (including private equity funds) → private equity funds → direct investment projects”. At the same time, The New Regulations on Asset Management clearly stipulates that the laws, regulations and specifications applicable to the venture capital funds and the government-funded industry investment funds shall be separately formulated. The Notice clearly points out that when “two kinds of funds” in line with the requirements of the provisions in The Notice accept the investment of the asset management products and other private equity investment funds, such “two kinds of funds” shall not be regarded as one layer of asset management products. Thus, the compliance of the nesting structure of “the government-funded industry investment funds → private equity funds → private equity funds” or “private equity funds → private equity funds → venture capital funds/government-funded industry investment funds” formed by the venture capital funds or government-funded industry investment funds nested by the asset management products has been recognized. 

IV. Distinguish from The New Regulations, and specify the fund regulatory authorities 

In order to implement the spirit of “power decentralization, combination of power decentralization and regulation, and service optimization” reform of the Central Government and further strengthen the financial risk prevention at the same time to minimize the regulatory interest arbitrage space, The Notice proposes to strengthen the regulation on two kinds of funds in line with the requirements of the provisions in The Notice and the financial institutions’ implementation of The Notice. The Notice points out that two kinds of funds shall submit the materials related to the financial institutions’ capital contribution and certifying that such funds meet the requirements of the provisions in The Notice to Development and Reform Commission within 15 working days after they accept the capital contribution of the financial institution by issuing the old products. The Notice has clearly stipulated the regulatory subjects of “two kinds of funds” and has also established the mechanism for information exchange between Development and Reform Commission and Ministry of Finance, People’s Bank of China, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission and State Administration of Foreign Exchange at the same time. The departments shall strengthen the regulation on violation of the financial institutions and two kinds of funds according to the division of their duties to build a good system environment for the sustainable and healthy development of the financial institutions’ asset management business and two kinds of funds and hold the bottom line of no systematic financial risk. 

V. Conclusion 

The Notice has been released with the purposes of settling the governance problems in the field of private equity fund, and it has specified that the financial institutions can continue the capital contribution to “two kinds of funds” within the transitional period and has settled the financing dilemma of the venture capital funds and the government-funded industry fund; At the same time, it has proposed the limited exemption for “two kinds of funds”. The Notice has exempted “two kinds of funds” from the upward penetrating regulation issue in the process of identifying the qualified investors and has exempted “two kinds of funds” (whether in the form of parent fund or sub-fund) from the layer limit as a separate layer of funds; In addition, it has specified that Development and Reform Commission will act as the regulatory department of “two kinds of funds” as well as the mechanism for information exchanges among multiple departments. The issuance of The Notice has better stimulated the roles of two kinds of funds, has promoted the social capitals and resources to support the innovation & entrepreneurship and industry transformation & upgrading, has promoted the standardized and healthy development of the venture capital funds and the government-funded industry investment funds and has guaranteed the steady development of the overall industry.