Viewpoint | Analysis of the practical impact of the Measures for the Supervision and Administration of Private Investment Funds (Draft for Comments)

In July 2023, the State Council issued the "Regulations on the Supervision and Administration of Private Equity Investment Funds" (hereinafter referred to as the "Private Equity Regulations"), which further clarified the continuous requirements, registration and filing, non-public fundraising, investment operations, supervision and management, and legal responsibilities. The institutional arrangements in this regard will bring the business activities of private equity funds into the track of rule of law and standardization for supervision.

In order to fully implement the requirements of the Private Placement Regulations, the China Securities Regulatory Commission refined, revised and improved the Interim Measures, and formed the "Measures for the Supervision and Administration of Private Placement Investment Funds (Draft for Comment)" (hereinafter referred to as the "Private Placement Measures (Draft for Solicitation of Comments)"), which solicited opinions from the public on December 8, 2023. The Private Placement Measures (Draft for Comments) have a total of 10 chapters and 82 articles.

This article will interpret the key provisions of the "Private Placement Measures (Draft for Comment)" and analyze the important impact of the "Private Placement Measures (Draft for Comment)" on the private equity business after its implementation.

Article 5, paragraph 2, of the Private Placement Measures (Draft for Comments): "The CSRC shall implement differentiated supervision and management of private equity fund managers according to their business type, scale of assets under management, continuous compliance, risk control and ability to serve investors, it also implements classified supervision and management of different types of private equity funds such as venture capital funds and real estate private equity funds, private equity investment funds, and private equity funds (hereinafter referred to as parent funds)."

Interpretation:Article 6 of the "Private Equity Regulations" stipulates: "The securities regulatory agency of the State Council shall implement differentiation for private equity fund managers based on the business type, asset management scale, continuous compliance, risk control, and ability to serve investors, etc. Supervision and management, and implement classified supervision and management of different types of private equity funds such as venture capital and securities investment."

The second paragraph of Article 5 of the Private Placement Measures (Draft for Comment) further clarifies and emphasizes the ideas of classified supervision and differentiated management on the basis of Article 6 of the Private Placement Regulations, and refines the types of funds that implement classified supervision. Including "venture capital funds and real estate private equity funds and other private equity investment funds, private equity investment funds, private equity investment funds, etc."

Item (II) of Article 11 of the Private Placement Measures (Draft for Comment): The private equity fund manager shall manage and keep separate accounts for the different private equity fund properties under management, ensure the independence of the private equity fund properties, and correspond to the invested assets The relationship is clear, accurate and complete.

Interpretation:According to the recent regulatory developments, the follow-up will focus on the financial independence of private equity fund managers and private equity funds, and focus on inspection.

Item (IV) of the first paragraph of Article 7 of the "Private Placement Measures (Draft for Comment)": "The legal representative, executive partner or appointed representative, and senior management personnel in charge of investment management shall have relevant work experience, and the total holding of private equity The proportion of the fund manager's equity or property shares shall not be less than 20% of the minimum initial paid-in monetary capital."

The second paragraph of Article 7 of the "Private Equity Measures (Draft for Comment)" stipulates: "Private equity fund managers controlled by financial institutions such as commercial banks, securities companies, fund management companies, futures companies, trust companies, insurance companies, etc., districted cities Private equity fund managers controlled by governments above the level and their authorized institutions, private equity fund managers controlled by institutions supervised by relevant overseas financial regulatory authorities, and other compliance with national regulations, the provisions of subparagraph (IV) of the preceding paragraph shall not apply."

Interpretation:This article continues the provisions of Article 8, Paragraph 1, Item 3 of the "Private Investment Fund Registration and Filing Measures" issued by the China Foundation and formally implemented on May 1, 2023, and Article 6 of Guideline 1, namely: "Legal representatives, executive partners or their appointed representatives, and senior managers responsible for investment management shall directly or indirectly hold a certain proportion of the equity or property shares of private fund managers, and the total paid-in capital shall not be less than 20% of the paid-in capital of the applicant institution, or not less than 20% of the minimum paid-in capital of the private equity fund manager as stipulated in Article 8, paragraph 1, item 1 of the Registration and Filing Measures (I. e., the minimum Not less than 2 million yuan)."

Paragraph 2 of Article 8 of the Measures for the Registration and Filing of Private Investment Funds: "Private fund managers controlled by financial institutions such as commercial banks, securities companies, fund management companies, futures companies, trust companies, insurance companies, etc,Private equity fund managers controlled by the government and its authorized agencies,The above provisions shall not apply to private equity fund managers controlled by institutions supervised by overseas financial regulatory authorities and other qualified private equity fund managers."

The difference between the second paragraph of Article 7 of the Private Placement Measures (Draft for Comment) and the second paragraph of Article 8 of the Measures for the Registration and Filing of Private Placement Investment Funds is that the Private Placement Measures (Draft for Comment) are limitedPrivate equity fund managers controlled by governments at or above the municipal level with districts and their authorized institutionsmay be exempt from the executive shareholding requirement. In accordance with the aforementioned requirements, private equity fund managers controlled by non-district municipal governments, district and county governments and their authorized institutions will need to meet the executive shareholding requirements in the future.

Article 19 of the Private Placement Measures (Draft for Comments): "Private Fund ManagersNo capital contribution may be made to establish a branch.If a subsidiary must be established in order to manage the property of a private equity fund, the private equity fund manager shall incorporate the subsidiary into the unified compliance wind control management and report in a timely manner to the fund industry association and the CSRC dispatch office at the place of registration and the place where the establishment is located."

Interpretation:According to the requirements of Article 19, private equity fund managers shall not set up branches including branches and offices; if conditions permit managers to set up subsidiaries, subsidiaries shall be included in the unified compliance management of managers, and shall report to the dispatched offices of China Securities Regulatory Commission where the managers are located and the subsidiaries are located.

Article 23 of the Private Placement Measures (Draft for Comments): "Unless otherwise agreed in the fund contract, the property of the private placement fund shall be entrusted to the trustee of the private placement fund. If the fund contract stipulates that the private equity fund property is not entrusted, it shall agree on institutional measures and dispute resolution mechanisms to ensure the safety of the private equity fund property, and make it clear that the private equity fund manager shall take segregation measures against the private equity fund property and other assets. A private fund that meets the following conditions shall be held in trust by a private fund custodian:

(I) established in the form of contract;

(II) accepting investment in asset management products and private equity funds;

The (III) mainly invests in a single target, overseas assets, over-the-counter derivatives, etc;

(IV) to carry out leveraged financing;

(V) other circumstances as prescribed by the CSRC.

The fund industry association shall make special publicity for unmanaged private equity funds."

Interpretation:Regarding custody matters, the following points should be paid attention to: 1. If the private equity fund property is not under custody, the institutional measures and dispute resolution mechanism to ensure the safety of the private equity fund property should be clearly stipulated in the fund contract, and it is clear that the private equity fund manager should take isolation measures for the private equity fund property and other assets; 2. The following types of fund products should be managed by the private equity fund custodian: contract fund; funds that accept investment in asset management products and private equity funds; funds that mainly invest in a single underlying, foreign assets, over-the-counter derivatives, etc.; funds that carry out leveraged financing.

Article 31 of the Private Placement Measures (Draft for Comments): "Private equity investment funds may be expanded if they meet the following conditions at the same time:

The (I) operates in a standardized manner and is in the investment period agreed upon in the fund contract;

The object of (II) is limited to the qualified investors specified in Article 42 of these Measures or other qualified investors with a single investment amount of more than 10 million yuan;

The (III) is held in trust by the private equity trustee;

The (IV) obtains prior decision-making consent of all investors or a decision-making mechanism recognized by investors in the manner agreed upon in the fund contract;

(V) private equity fund managers have not violated laws, administrative regulations, the provisions of the China Securities Regulatory Commission and the fund contract;

(VI) other conditions stipulated by the CSRC and the fund contract.

A private equity fund that conducts a single project investment may not expand to investors other than the original investor."

Interpretation:The difference between this article and the previous requirements of the CSRC and the China Foundation Association on fund expansion is: 1. The target of fund expansion is limited to qualified investors (financial institutions, asset management products, social security funds, fund products, etc.) as stipulated in Article 42 of these Measures orSingle investment amount of more than 10 million yuanOther qualified investors; 2. Private equity funds that invest in a single project are only allowed to expand to original investors.

Article 34 of the Private Placement Measures (Draft for Comments): "Private equity funds shall have the ability to guarantee basic investment, the ability to resist risks and the scale of paid-in contributions that meet the requirements of the investment strategy, and shall be limited to monetary contributions:

The paid-in scale of (I) private equity investment funds shall not be less than 10 million yuan, of which the initial paid-in scale of venture capital funds shall not be less than 5 million yuan, and shall reach the paid-in scale of 10 million yuan within 6 months after the completion of the filing, and the paid-in scale of real estate private equity funds shall not be less than 30 million yuan;

The paid-in scale of (II) private equity investment funds shall not be less than 10 million yuan;

The paid-in scale of the (III) parent fund shall not be less than 50 million yuan.

The private equity fund manager shall not circumvent the private equity fund's paid-up scale requirement by means of short-term redemption of private equity fund shares by investors. The Fund Industry Association implements classified publicity based on the type of private equity fund and the size of the funds raised."

Interpretation:1. Clarify that private equity funds are limited to monetary contributions; 2. Further clarify the initial fundraising scale requirements for different types of funds:

(1) The initial paid-in capital of the private equity investment fund shall not be less than 10 million yuan, of which the initial paid-in scale of the venture capital fund shall not be less than 5 million yuan, and shall reach the paid-in scale of 10 million yuan within 6 months after the completion of the filing;

(2) The paid-in scale of real estate private equity funds shall not be less than 30 million yuan;

(3) The paid-in scale of private equity investment funds shall not be less than 10 million yuan;

(4) The paid-in scale of the parent fund shall not be less than 50 million yuan.

Article 37 of the Private Placement Measures (Draft for Comments): "If a private equity fund manager accepts the entrustment of a single investor to establish a private equity fund, the two parties may make special agreements on the investment decision-making mechanism, custody, information disclosure and audit of the private equity fund in the fund contract.

A single investor is limited to the investors specified in Item (VI) of (IV) (V) (I) to Article 42 of these Measures, and the paid-in scale of private equity funds shall not be less than 0.1 billion yuan."

Article 42 of the Private Placement Measures (Draft for Comments): "The following investors are considered qualified investors:

(I) institutions established in accordance with the law and subject to the supervision of the financial supervision and administration institution of the State Council, including securities companies and their subsidiaries, fund management companies and their subsidiaries, futures companies and their subsidiaries, commercial banks and their wealth management subsidiaries, insurance companies, insurance asset management companies, financial asset investment companies, trust companies, financial companies and other institutions prescribed by the CSRC;

(II) the asset management products legally issued by the institutions specified in Item (I) of this Article;

Private equity fund managers and private equity funds (III) registered with the Fund Industry Association;

(IV) pension funds such as social security funds, basic pension insurance funds and annuity funds, and social welfare funds such as charitable funds;

(V) of qualified foreign investors;

Funds established with the participation of (VI) government funds or qualified government funds;

(VII) other investors as prescribed by the CSRC."

Interpretation:According to the requirements of Article 37 of the Private Placement Measures (Draft for Comment), a single investor type is limited to investors who meet the (VI) provisions of Article 42 (I) (IV) (V), and the amount of paid-in capital before filing is not less than 0.1 billion yuan. This provision greatly improves the standards for the establishment of single-investor private equity funds.

Article 38 of the Private Placement Measures (Draft for Comments): "Where a private equity fund manager invests more than 80% of the fund property of a single private equity fund into a single target, it shall also meet the following conditions:

(I) there is a clear agreement in the fund contract;

The paid-in scale of (II) private equity funds shall not be less than 20 million yuan. If there are natural person investors, the paid-in scale of a single natural person investor shall not be less than 10 million yuan;

(III) that the single target is not related to the private equity fund manager and its shareholders, actual controllers, partners and practitioners, except for the unanimous consent of all investors;

(IV) all investors to carry out special risk tips and confirmed by investors, private equity fund managers on the decision-making process, risk tips, etc. to leave a written mark;

(V) other conditions agreed upon by the CSRC and the fund contract.

Non-standardized assets of a single subject and its related parties are considered to be consolidated as the same asset. No unit or individual may circumvent the identification of a single subject by splitting the same asset."

Interpretation:1. This article specifies the proportion requirement of a single investment target (more than 80% of the fund property), and the initial fund raising scale is not less than 20 million yuan;

2. Compared with the previous provisions, the requirement of the minimum paid-in 10 million of a single natural person for a single subject has been increased;

3. Added the requirement that all investors must agree to a single underlying fund-related transaction.

4. Added the requirement that non-standardized assets associated with a single subject will be recognized as the same asset.

Article 40 of the measures for Private placement (draft for soliciting opinions): "qualified investors of private equity funds refer to natural persons, legal persons or other organizations that have reached the prescribed asset scale or income level, have the corresponding risk identification ability and risk bearing ability, invest in a single private equity fund not less than the prescribed amount, and meet one of the following conditions:

(I) a natural person who has more than two years of investment experience and meets one of the following conditions: family financial assets are not less than 5 million yuan, family financial net assets are not less than 3 million yuan, or my average annual income in the past three years is not less than 400000 yuan;

(II) a legal person or other organization with a net asset of not less than 10 million yuan. The financial assets referred to in the preceding paragraph refer to bank deposits, stocks, futures, bonds, fund shares, asset management products, etc.

The investment of the practitioners of the private equity fund manager in the private equity fund managed by the private equity fund manager shall not be restricted by this Article and Articles 38 and 41 of these Measures."

Interpretation:Compared with Article 12 of the Interim Measures, the changes of this article are as follows: 1. Natural person investors are required to have more than 2 years of investment experience; The amount of family financial assets has been increased from 3 million yuan to 5 million yuan. One of the conditions is to increase "the net assets of family finance not less than 3 million yuan". In the past three years, my average annual income has been adjusted from 500000 yuan to 400000 yuan. 2. To further clarify that the practitioners of private equity fund managers may be exempted from the requirements of this article and Articles 38 and 41 of these Measures.

Article 41 of the "Private Equity Measures (Draft for Comment)": "The paid-in amount of a single investor's investment in a single private equity investment fund or parent fund shall not be less than 1 million yuan, and the paid-in amount of investment in a single private equity investment fund shall not be less than 3 million yuan. For investment in the following private equity funds, the paid-in amount of a single investor shall not be less than 5 million yuan:

(I) real estate private equity fund;

(II) private equity funds that mainly invest in a single target, foreign assets, over-the-counter derivatives, etc;

(III) unmanaged private equity funds;

(IV) private equity investment funds sold by private equity fund sales agencies;

(V) other circumstances as prescribed by the CSRC."

Interpretation:1. The minimum paid-in capital standard for investors of private equity funds has been raised from 1 million yuan to 3 million yuan as stipulated in the interim measures; 2. It is clear that the minimum paid-in capital standard for individual investors is not less than 5 million yuan for real estate private equity funds, single investment target and unmanaged private equity funds.

Article 45 of the "Private Equity Measures (Draft for Comment)": "Private equity fund managers and private equity fund sales institutions shall establish and improve internal control systems for investors' due diligence and other aspects, and fully and timely understand investors' sources of funds and assets. Liabilities, investment experience, risk appetite, integrity and other information shall be verified and verified by necessary means to ensure that investors comply with the provisions of these Measures."

Interpretation:1. Private equity fund managers should establish a system related to investor due diligence; 2. Private equity fund managers should conduct due diligence on investors in accordance with the requirements of the system in the process of raising funds, and fully and timely understand the investor's source of funds, assets and liabilities Situation, investment experience, risk appetite, integrity status and other information.

Article 54 of the "Private Placement Measures (Draft for Comment)": "Private equity funds may invest in another layer of asset management products or private equity funds, and the invested products shall not be reinvested in other asset management products or private equity funds other than public securities investment funds, Except as otherwise provided by laws, administrative regulations and the state. The parent fund shall not be included in the investment hierarchy, and the specific measures shall be separately prescribed by the CSRC.

Private equity fund managers shall not violate the provisions on nesting, circumvent or disguise the regulatory requirements of laws, administrative regulations and the financial supervision and administration authorities under the State Council, such as registration and filing, qualified investor standards, number restrictions, investment scope, and related transaction norms."

Article 79 of the Private Placement Measures (Draft for Comments): "For those who do not comply with the provisions of Article 54 of these Measures, the rectification shall be completed within two years. The Fund Industry Association shall make special publicity to the private equity fund managers and private equity funds that have not completed the rectification by the due date, and shall take self-discipline management measures and disciplinary measures depending on the seriousness of the circumstances."

Interpretation:1. This time it is clear that the nesting of private equity funds shall not exceed 2 layers; 2. Private equity funds that do not meet the above requirements shall be rectified within 2 years; 3. The parent fund may be exempted from one layer and shall not be included in the investment level.

Article 55 of the "Private Equity Measures (Draft for Comment)": Where private equity fund shares are classified, the name shall contain the words "structured" and "classified", and the classification ratio shall comply with the regulations of the China Securities Regulatory Commission and the Fund Industry Association. Open-end private equity funds shall not be graded.

Graded private equity funds shall not directly or indirectly provide capital preservation and income protection arrangements to preferred share subscribers. The shares of the same level of graded private equity funds shall enjoy the same rights and interests and bear the same risks, and when the private equity fund generates investment income or suffers investment losses, all investors shall enjoy the gains or bear the losses.

Interpretation:1. Structured products shall reflect the words "structured" and "graded" in the name; 2. When private equity funds generate investment income or investment losses, all investors shall enjoy the income or bear the losses.