Issuing Body: National Development and Reform Committee
Issuing Date: November 23, 2011
Effective Date: November 23, 2011

Acting to modify and expand a ten-month-old regional pilot program nationwide, the National Development and Reform Commission (NDRC) has passed rules administering equity investment enterprises throughout China. The Notice on Promotion of the Development of Equity Investment Enterprises (Equity Investment Enterprise Notice) was issued and became effective on November 23, 2011. It replaces the NDRC's Circular on Further Standardizing the Administration of Development and Filing of Equity Investment Enterprises in Pilot Areas (Equity Investment Enterprise Filing Circular), which had instituted standard operational, disclosure and filing requirements for private equity enterprises in the pilot economic development areas of Tianjin, Beijing, Shanghai, Jiangsu, Zhejiang and Wuhan, where PE investments are most active.

Background: The Basic Private Equity Regulatory Framework

The Equity Investment Enterprise Filing Circular was issued by the NDRC in January 2011 and summarized in the April 2011 issue of China Law Update. While extending China's private equity (PE) investment regulation nationally, the recently issued Equity Investment Enterprise Notice leaves intact the following features of the basic regulatory framework of  the pilot program:

• PE enterprises 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 by 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. PE enterprises may not directly or indirectly promote investments or solicit money from nonspecific targets via media announcements.
  
  
• Sponsors of PE enterprises should fully disclose investment risks and potential investment losses to investors, and are prohibited from making any commitment to ensure recovery of invested capital or to promise fixed returns.
  
  
• PE enterprises 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.
  
  
• PE enterprises are required to disclose operational information to investors. All such enterprises must submit an annual business report and an audited financial report to the NDRC and its local offices within four months of the end of each fiscal year.
  
  
• PE enterprises are required to report the occurrence of significant events such as amendments to the articles of association or partnership agreement, increases or decreases of capital, division or merger of the enterprise, dissolution, bankruptcy or the takeover of the enterprise's assets by a receiver, to the NDRC and its local office within ten working days.
  
  
• PEs established in pilot areas must apply for filing with the NDRC.

Filing Requirements

The Equity Investment Enterprise Notice does make some important changes to the pilot program regulatory system previously instituted by the NDRC. In accordance with the Equity Investment Enterprise Filing Circular, PE enterprises with operating capital (including both contributed and non-contributed capital) of RMB500 million or less (or the equivalent in foreign currency) were exempt from filing requirements with the NDRC. The Equity Investment Enterprise Notice cancels the capital threshold and instead requires all private equity enterprises to fulfill this filing requirement within one month of registering with the State Administration of Industry and Commerce.

PE enterprises with capital of RMB500 million or more should file with the central NDRC, while those with capital of less than RMB500 million should file with provincial-level NDRC offices.

Private equity enterprises that were established prior to November 23, 2011 (before enactment of the Equity Investment Enterprise Notice), are required to complete filing by February 23, 2012.

Number of Investors

The Equity Investment Enterprise Notice establishes that the number of investors in a private equity enterprise should be compliant with requirements of the Company Law of the People's Republic of China (50 or fewer investors for a limited liability company; between two and 200 investors for a joint stock company) and the Partnership Law of the People's Republic of China (at least two partners for a general partnership enterprise; two to 50 partners for a limited partnership enterprise).

The Equity Investment Enterprise Filing Circular was silent on the number of investors.

Qualifications of Senior Managers

The Equity Investment Enterprise Notice makes clear that for a private equity enterprise established in the form of company, the term "senior manager" refers to a director, supervisor, manager, vice manager, financial controller, secretary of the board of directors and other personnel prescribed in the articles of association, or the general partner(s) and other personnel prescribed in the partnership agreement of a private equity enterprise established in the form of partnership. The notice further sets forth the qualification requirement that all senior managers must not be subject to noncompliance records or any pending "significant" economic disputes in the previous five years, and at least three senior managers must have two years or more of experience in private equity or a related business.

Conclusions

The Equity Investment Enterprise Notice establishes the first nationwide rules for the establishment and operation of private equity enterprises in China. It has been reported that detailed guidelines for the notice are expected soon.