Circular on Further Standardizing the Administration of Development and Filing of Equity Investment Enterprises in Pilot Areas

Issuing Body: National Development Reform Committee
Issuing Date: January 31, 2011
Effective Date: January 31, 2011

In an effort to better administer equity investment enterprises in China, the National Development and Reform Commission (NDRC) has promulgated a circular that for the first time codifies standard operational, disclosure, and filing requirements for private equity companies investing in pilot economic development areas. Issued on January 31, 2011, and effective immediately, the Circular on Further Standardizing the Administration of Development and Filing of Equity Investment Enterprises in Pilot Areas (Equity Investment Enterprises Filing Circular) aims to provide better oversight over equity investment enterprises, generally known as private equity companies (PEs). This circular applies to PEs that fulfill relevant requirements in the pilot development areas of Tianjin, Beijing, Shanghai, Jiangsu, Zhejiang, and Wuhan, where PE investments are most active.

Operational Requirements

According to the Equity Investment Enterprises Filing Circular, PEs are generally established in China as companies or partnerships. If established as a company, a PE may operate either by forming its own internal management team or entrusting its assets to other equity investment enterprises or equity investment management enterprises.

A private equity company may only raise capital privately, from specific targeted persons or companies that have the capacity to identify and take risks. PEs may not directly or indirectly promote investments or solicit money from nonspecific targets via media announcements (including on the PE firm's own website), the posting of notices, distribution of leaflets, sending text messages, holding seminars and lectures to the public, or any other means (including placing prospectuses at commercial banks, securities companies, trust and investment companies, and other institutions).

Sponsors of PEs should fully disclose the investment risks and potential investment losses to investors, and are prohibited from making any commitment to ensure recovery of invested capital or fixed returns.

PEs may invest in equities that are not traded publicly. Idle funds may only be deposited in banks or used for the purchase of national bonds or other fixed-income investment products.

Information Disclosure Requirements

The Equity Investment Enterprises Filing Circular requires PEs to disclose operational information to investors in accordance with the PE's articles of association if the PE is formed as a company or in accordance with the partnership agreement if the PE is formed as a partnership. In addition, all PEs must submit an annual business report and an audited financial report to NDRC and its local bureaus within four months of the end of each fiscal year. Institutions entrusted to manage PEs must submit an annual asset management report and an annual asset custody report to NDRC and its local bureaus where the managing institutions are located within four months of the end of each financial year.

A PE is also required to report the occurrence of any of the following significant events to NDRC and its local bureau within ten working days:

1. Amendment of the articles of association, partnership agreement, entrusted management agreement, or other instruments of the PE or the entrusted management institution
2. Any increase or decrease of capital or debt financing in other enterprises by the PE or the entrusted management institution
3. Division or merger of the PE or entrusted management institution
4. Changes in the entrusted management institution, including changes in senior management personnel and other significant matters
5. Dissolution or bankruptcy of the PE or the takeover of its assets by a receiver

Filing Requirements

In accordance with the Equity Investment Enterprises Filing Circular, PEs and enterprises that invest in PEs which are registered with the administration for industry and commerce in pilot areas and invest in non-publicly-traded equities must apply for filing with NDRC. Such PEs and enterprises that invest in PEs are subject to filing administration in accordance with the requirements contained in the Equity Investment Enterprises Filing Circular.

Enterprises that satisfy any of the following conditions are exempt from filing:

1. PEs that have filed as venture capital enterprises in accordance with the Tentative Measures for the Administration of Venture Capital Investment Enterprises, which was issued in 2005 by NDRC, the Ministry of Commerce , and a number of other agencies
2. PEs with operating capital (including both contributed and non-contributed capital) of RMB500 million or less (or the equivalent in foreign currency)
3. PEs that are established and fully funded by a single institution or individual, or that are established and funded by two or more investors, and the investors are all wholly owned subsidiaries of one institution

An applicant for filing shall send relevant materials to NDRC bureaus at the provincial level for preliminary examination. The provincial-level NDRC bureau will issue a preliminary examination opinion regarding the completeness of the application materials to NDRC within 20 working days of receiving the application of an equity investment enterprise.

Within 20 working days after receiving the filing application and preliminary examination opinion of the provincial-level bureau, NDRC shall announce the names and basic information of the PEs on NDRC's website and complete the filing process.

If any of the following circumstances occurs, an equity investment enterprise may apply for cancellation of the filing: 1) the PE has been dissolved; 2) equity investment is no longer the PE's main business; or 3) the PE has separately filed as a venture capital investment enterprise according to the Tentative Measures for the Administration of Venture Capital Investment Enterprises.

The Equity Investment Enterprises Filing Circular does not provide for any monetary liability. However, if NDRC or one of its local bureaus discovers that a PE has not conducted a filing, the PEs or entrusted management institutions will be urged to begin filing procedures with the local NDRC bureau within 20 working days. If a filing application still is not submitted, NDRC will place the enterprise on a public list of "equity investment enterprises and entrusted management institutions that evade filing supervision and administration," which will be available to the public on the NDRC website.

Conclusion

Though the Equity Investment Enterprises Filing Circular is silent about whether it applies to foreign PEs, an NDRC official has orally stated that foreign PEs are also subject to filing. It is therefore advisable for foreign PEs to prepare for this requirement.