New regulations and trends on China’s private investment fund industry in 2023

Chen Cao 
Chance Bridge, Beijing
chen.cao@chancebridge.com

Ning Zhu 
Chance Bridge, Beijing
ning.zhu@chancebridge.com

Zilin Zhao
Chance Bridge, Beijing
zilin.zhao@chancebridge.com

New compliance requirements in 2023

The year 2023 outlines a critical juncture in the compliance journey within China’s private investment fund sector, characterised by two central developments:

• First, the Asset Management Association of China (AMAC) issued the Measures for the Registration and Recordation of Private Investment Funds (‘Measures for the Registration and Recordation’), a landmark regulation that established a new regulatory model for the private investment fund industry, focusing specifically on private fund manager registration and fund recordation. This framework places strict requirements on private fund managers and the products they offer, aimed at enhancing their professionalism and integrity.
• Secondly, the State Council introduced the first administrative regulation, setting the stage for the standardisation of the private investment fund industry. This regulation strengthens the importance of the departmental rules issued by the China Securities Regulatory Commission (CSRC) and the self-regulatory rules introduced by AMAC. It supports these rules with the structure of superior laws.

In light of these new regulations, we examine the main changes under the newly implemented framework.

For private fund managers

Increased capital requirement

The Measures for the Registration and Recordation clearly stated that a paid-in capital of not less than CN¥ 10m is one of the continuous compliance requirements for private fund managers. Both the subscribed and paid-in capital of private fund managers must not be less than CN¥ 10m during registration and subsequent operations (except for managers managing venture capital funds).

New shareholding requirements for senior management

The Measures for the Registration and Recordation and its supporting guidelines require that the legal representative, executive partner or its appointed representative and senior managers responsible for investment management shall all hold a certain proportion of the shares or property share of the private fund manager, with a total paid-in capital of at least CN¥ 2m (private fund managers controlled by financial institutions such as commercial banks, securities companies, fund management companies, futures companies, trust companies, insurance companies etc, private fund managers controlled by the government and its authorised agencies, private fund managers controlled by institutions regulated by overseas financial regulatory authorities and other private fund managers that meet the requirements are excluded).

Higher professional and restrictive requirements for shareholders and actual controllers of private fund managers

The controlling shareholders, actual controllers and general partners of private fund managers must have at least five years’ experience in asset management, investment and related industries. The above-mentioned shall not hold positions in non-affiliated private fund managers and shall not engage in conflicting businesses for the previous five years. These conflicting businesses refer to those incompatible businesses with private fund management, such as private lending, private financing services, loans, guarantees, financial leasing, development of real estate and trading platforms etc, except otherwise provided by CSRC and AMAC.

Higher professional and restrictive requirements for senior management of private fund managers

Except for the minimum industry experience of three years for Risk Compliance Managers, the minimum industry experience requirement for other senior managers is five years, and there is a strict division between private equity investment experience and private securities investment experience. Apart from industry experience requirements, there are performance requirements for senior managers responsible for investment. The Measures for the Registration and Recordation does not prohibit senior managers from holding part-time positions, but they must ensure that they have enough time and energy to perform their duties, and they should not hold positions in conflicting enterprises. This does not include senior managers holding positions in invested companies or holding director or supervisor positions in other companies.

For fund filing and registration

Further clarification of the nature of the fund

The Measures for the Registration and Recordation added situations that do not require registering the fund, clearly stating that only the business activities of private funds, which are non-publicly raised funds established for the purpose of making investments and whose assets are managed by private fund managers or general partners, need to be filed with AMAC. Employee stock ownership plans established for the purpose of employee incentives and the employee co-investment platform of private equity fund managers are not required to file for record.

Increased initial paid-in capital requirement

In principle, whether it is a private equity fund or a private securities fund, the scale of the initial paid-in capital shall not be less than CN¥ 10m. Previously, AMAC did not have a requirement for the initial paid-in capital of fund products, only requiring investors to pay at least CN¥ 1m to meet the requirements of qualified investors. The Measures for the Registration and Recordation requirement for the paid-in capital of funds is a challenge for small and medium-sized fund managers and a restriction on products established by some small and medium-sized fund managers for the sake of shell preservation. It is also a specific measure for AMAC to further ‘promote the good and limit the inferior’.

Differential arrangements for venture capital funds

Article 45 of the Measures for the Registration and Recordation has redefined venture capital funds, providing a clear definition for venture capital funds. At the same time, the Measures for the Registration and Recordation explicitly stipulates that private fund managers who specialise in managing venture capital funds are not subject to the restriction that the paid-in monetary capital shall not be less than CN¥ 10m. In addition, regarding the initial paid-in fundraising scale of private funds, the Measures for the Registration and Recordation requires the initial paid-in capital of venture capital funds to be CN¥ 5m, which is lower than the requirement of CN¥ 10m for general private equity funds. However, the minimum capital contribution for the initial fundraising mentioned above shall be made within six months after the filing of the fund management materials.

Strengthening the role of the Risk Disclosure Statement

The Measures for the Registration and Recordation has clearly provided matters and arrangements for a special risk warning in the Risk Disclosure Statement, which is an integration and supplement to the previously fragmented information, further enhancing the role of this statement for private fund products.

Future development trends of the private investment fund

According to a recent notice issued by AMAC, a group of private investment fund managers have been placed on the operational anomaly list, reflecting the regulatory authorities’ resolve to rectify irregularities within the industry.

Looking forward, as China’s market-driven economy progresses and the multi-tiered capital market evolves, the country’s private investment industry is expected to sustain steady growth. With the private investment market entering a higher-quality development phase, the importance of compliance operations for private investment fund managers has heightened. Non-compliant managers will likely fade, causing funds and investment opportunities to lean more towards compliant managers with robust capabilities and standardised operations.

Meanwhile, independent intermediary agencies, such as law firms and accounting firms, are set to play a more significant role. These agencies will provide independent third-party opinions on the investment activities of private investment fund managers, ensuring their adherence to various regulatory requirements.

In closing, we would like to remind all stakeholders to familiarise themselves with these significant changes and trends and to prepare for what lies ahead.