Reproduced with permission from World Securities Law Report, null, 03/10/2015. Copyright 姝 2015 by The Bureau
of National Affairs, Inc. (800-372-1033) http://www.bna.com
VOLUME 21, NUMBER 3 >>> MARCH 2015
China: Recent Developments in the Regulation of
Private Placements
By Liza Mark, of Haynes and Boone LLP, Shanghai.
Unlike in the U.S., private placements of securities in
China are regulated differently, depending on who is
actually doing the private placement.
Historically, private placements of securities in China
are sorted into three main categories, and each category is regulated by different agencies with their own
rules and regulations:
1) Private placement of securities by publicly listed
companies: Regulated by the China Securities Regulatory Commission (‘‘CSRC’’).
2) Private placement of securities by private equity
funds and venture capital funds (the money raised
is intended to be used for investing in other securities): Historically regulated by a hodgepodge of
regulators, including the National Development and
Reform Commission1 (‘‘NDRC’’), the CSRC and
various local regulators.
3) Private placement of equity securities by nonpublicly listed companies: This is a regulatory gray
area and no definitive regulation has been set for
such capital raising activity.
Recent changes appear to portend a shift towards a
more uniform way of regulating capital raising by private placements of securities in China.
On May 8, 2014, the State Council of China released
its Several Opinions of the State Council on Further
Promoting the Healthy Development of the Capital
Market (‘‘2014 State Council Opinions’’), promulgating the requirements laid down at the 18th National
Congress of the Communist Party of China (‘‘CPC’’)
and the Second and Third Plenum Sessions of the 18th
Central Committee of the CPC.
The 2014 State Council Opinions states:
[a] private placement system shall be established
and improved. It is important to formulate a set of
criteria on qualified investors, specify the investor
suitability requirements on the private placement of
various products and the information disclosure requirements on private placement to the same type
of investors, and standardize placement activities.
No administrative examination and approval shall
be instituted for private placement. Instead, issuers
of all types are allowed to issue, on the basis of compliance, stocks, bonds, funds and other products to
an accumulated number of investors that does not
exceed the number specified by laws.
Although the 2014 State Council Opinions is only a declarative document and not actual regulation, the State
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Council Opinions and a series of recent laws in China
are fundamentally changing the regulatory framework
for private placements in China.
Recent changes appear to portend a shift towards a
more uniform way of regulating capital raising by
private placements of securities in China.
What Is a ‘Private Placement’ in China?
Historically, there is no uniform definition of what is a
‘‘private placement of securities’’ in China. More importantly, there is no regulation that allows for and regulates private placements of equity securities by private
companies that need operational capital. Therefore,
whether a private company can, and under what circumstances will it be allowed to, raise capital via a private
placement of its securities has always been a legal gray
area.
A rough concept of what is and is not a ‘‘private placement of securities’’ does exist in the 2005 Securities Law
of China (‘‘Securities Law’’) by negative inference. The
Securities Law defines a ‘‘public offering’’ as issuing securities to ‘‘more than 200 specific individuals.’’ However, it is important to note that the Securities Law generally does not apply to companies or funds that are not
publicly listed in China, so even this general ‘‘200 specific individual’’ standard may or may not apply to such
other entities.
To make matters more confusing, private placements of
securities in China are regulated by different regulators,
including the CSRC, the NDRC and multiple layers of
local governments.
Private placements of A-share listed companies in China
are subject to the CSRC’s examination and verification
measures under the Administration of Issuance of Securities by Listed Companies promulgated by the CSRC,
while private placements of the investment funds industry were originally regulated by both the NDRC and multiple layers of local governments in China. Private equity
funds in Shanghai were created through registration
with the Shanghai Municipal Office of Finance Services,
and were regulated by both the Shanghai Development
and Reform Commission and the Shanghai Municipal
Office of Finance Services. In Beijing, funds were created by the Financial Service Steering Team Office of
the Beijing Municipality, and regulated by the Beijing
Municipal Bureau of Financial Work and the Beijing
Municipal Commission of Development and Reform.
These authorities have respectively claimed jurisdiction
over regulation of different areas of private capital raising, creating often inconsistent and sometimes even
overlapping regulatory requirements.
Even within the arena of investment funds, in the past,
the form a fund took would determine the regulations it
was subject to. Prior to the promulgation by the Standing Committee of the National People’s Congress of the
restated Securities Investment Funds Law, effective June
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1, 2013 (‘‘Securities Investment Funds Law’’), a fund
sponsor had a choice between forming a ‘‘start-up investment enterprise’’ (similar to a venture capital fund) under the NDRC’s regulation, or an ‘‘equity investment enterprise’’ (similar to a private equity fund) under various
local governments’ regulation. The difference between
what was a ‘‘start-up investment enterprise’’ and what was
an ‘‘equity investment enterprise’’ was not well defined,
but they were regulated very differently, including requirements for minimum fund size, minimum investor
subscription amount, capitalization for its management
company, filing requirements, preferential tax policies,
and who would qualify as investors, among other things.
The New Securities Investment Funds Law
and the CSRC Regulations
The Securities Investment Funds Law, as a central government promulgated statute, for the first time formalized a single regulatory regime for private fund raising
activities of investment funds within China. It also resolved the ‘‘turf wars’’ between the various regulators by
declaring that the CSRC shall be the one and only regulator of private placement activities in the investment
funds area.
The CSRC in turn promulgated the Interim Regulations
on the Supervision and Administration of Private Investment Funds (‘‘CSRC Regulations’’) in August 2014 (see
analysis at WSLR, October 2014, page 14). The CSRC Regulations introduced registration and filing requirements,
a ‘‘qualified investor’’ standard, and the definition and
prohibition of general solicitation. The CSRC Regulations also delegated most of the routine monitoring
power for private investment funds to the Asset Management Association of China (‘‘AMAC’’), a self-disciplinary
non-profit association for the industry of securities investment funds.
We expect that the regulatory regime in China
relating to private placements across different types
of capital formation activities will likely consolidate
and move closer to a uniform standard.
Even though the Securities Investment Funds Law applies only to fund raising activities by entities that raise
funds for re-investment of such funds into another company’s securities (i.e., investment funds), its promulgation introduced many concepts that are already being
used in private placement activities outside the investment funds industry.
Definition of a ‘Qualified Investor’
The CSRC Regulations lay out the requirements for
what constitutes a ‘‘qualified investor’’ who can participate in a private placement and invest in an investment
fund. Such ‘‘qualified investor’’ must:
s invest at least CNY 1 million (U.S.$162,359) as a capital commitment in the fund, and
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WSLR
ISSN 1357-0889
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s as an institutional investor, must have net assets of at
least CNY 10 million (U.S.$1,623,590), or
s as an individual investor, must own financial assets
(including bank deposits, stocks, bonds and other financial assets, but excluding real property) of at least
CNY 3 million (U.S.$487,077), or have annual income during the preceding three years of at least
CNY 500,000 (U.S.$81,179).
The CSRC Regulations further list certain institutions to
be ‘‘qualified investors’’ with no asset requirements, including social/public interest-related funds such as pension funds, annuity funds, charity funds, other investment plans already registered with the AMAC, or fund
managers and their employees who co-invest in the relevant funds under their management, etc.
A fund manager in China is required to prepare a detailed questionnaire for each potential investor to assess
whether the investor meets the requirements of a ‘‘qualified investor.’’ However, the methodologies and standards of verifying a ‘‘qualified investor’’ (i.e., to what extent should the fund manager conduct diligence) remain unclear under the CSRC Regulations.
Compared with the CSRC’s ‘‘qualified investor’’ test, the
U.S. has a more fleshed out definition of ‘‘accredited investors’’ under Regulation D of the Securities Act of
1933, as amended (‘‘’33 Act’’). In addition, the ’33 Act
allows for securities to be sold to 35 other nonaccredited ‘‘sophisticated purchasers’’ without impacting
the legality of the private placement, as long as such ‘‘sophisticated purchasers’’ have certain knowledge and experience and obtain certain information about the offering party2 . The CSRC Regulations do not provide such
flexibility.
Furthermore, unlike the CSRC’s silence on the verification requirements for what constitutes a ‘‘qualified investor,’’ the ’33 Act sets out clear rules and standards with
respect to the verification of an ‘‘accredited investor.’’3
Restriction on Marketing Activities
The CSRC Regulations also prohibit promoting the investment fund to non-specific investors through general
solicitation or general advertising for a legal ‘‘private
placement.’’ General solicitation is defined to include
promoting the fund to the public by means of newspapers, radio, television, Internet and other public media
networks, or via seminars, colloquiums, posters, short
message service (‘‘SMS’’) or WeChat4 messages, blogs,
e-mails, etc.
In addition, any form of principal-protected commitments or minimum returns guarantee are strictly prohibited in the marketing materials used to solicit prospective investors.
Such restriction on general solicitation is very similar to
the approach in the U.S. under Rule 506(b) of Regulation D of the ’33 Act. Obviously, the newly adopted Rule
506(c) of the ’33 Act allows a legal private placement to
use general solicitation and advertising as long as certain
other requirements on the ultimate investors are met.5
WORLD SECURITIES LAW REPORT
ISSN 1357-0889
Since the CSRC Regulations are just now setting out the
restriction on general solicitation concept, it will probably take some time before the regulatory landscape in
China further distinguishes between different types of
private placements and the corresponding levels of investor protection that may allow for general solicitation.
Filing Requirements
After each successful raising of money from investors,
the fund manager is required under the CSRC Regulations to file with AMAC certain information and legal
documents relating to the investment fund.
Unlike the simple information called for in Form D under Regulation D of the ’33 Act, the information required is quite extensive, including:
s information on the main investment direction of the
fund and its fund category indicated according to the
main investment direction;
s the fund contract, and the articles of association or
partnership agreement of the fund;
s the fund prospectus shall also be submitted if it has
been provided for investors during fund raising;
s where the fund is established in the form of an enterprise, such as a company or partnership, the industrial and commercial registration and photocopies of
the original and duplicates of the business license
shall also be submitted;
s where the fund is placed under entrusted management, the agreement on entrusted management shall
be submitted. Where the properties of the fund are
entrusted to a custodian, the agreement on custody
shall also be submitted; and
s any other materials required by the AMAC.
The AMAC is required to post such filings on its website
within 20 working days after all the required recordfiling materials of a fund have been submitted. Therefore, all this information becomes public.
By comparison, private placements in the U.S. have a
much more simplified publicly filed information requirement. Upon the completion of a private placement
relying on Regulation D of the ’33 Act, the seller is required to file a Form D. A Form D is a brief notice that
includes the names and addresses of the company’s promoters, executive officers and directors, and some details about the offering, but contains little other information about the company or the expected investment.6 The Form D is required to be filed within 15
days after the first sale of securities in the offering.
Conclusion
Although it may still be too early to tell when China will
eventually combine all private placement regulations
into one uniform regulatory framework, like in the U.S.
and other mature markets, we are seeing other regulaBloomberg BNA
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tions being promulgated that adopt the above standards
when regulating private placements in other capital formation categories.
For example, the CSRC itself recently promulgated the
Administrative Provisions on the Asset Securitization
Business of Securities Companies and the Subsidiaries of
Fund Management Companies, specifying that the offering of privately placed asset-backed securities in China
shall also refer to certain regulatory requirements under
the CSRC Regulations, including the ‘‘qualified investor’’ criteria. In addition, the proposed Administrative
Provisions on Crowd-funding of Private Equity, which
are under public comments, also explicitly adopt virtually the same ‘‘qualified investor’’ test as in the CSRC
Regulations.
such activities across the different categories of capital
formation activities.
NOTES
1
The NDRC is a department under the State Council of China with
primary responsibility for guiding overall economic system reform and
macro-control of the country, yet it has turned into one of the biggest
and most powerful Chinese bureaucracies in its influence and ability
to push its government-oriented preference into every market segment.
2
See Regulation D § 230.506 (b) (2) (ii) Nature of purchasers.
3
http://www.sec.gov/rules/final/2013/33-9415.pdf.
4
A widely used mobile and voice messaging communication service
developed by Tencent in China.
5
SEC New C&DIs regarding Rule 144A and Rule 506(c), November
13, 2013, question 206.09.
6
http://www.sec.gov/answers/rule506.htm.
Therefore, we expect that the regulatory regime in
China relating to private placements across different
types of capital formation activities will likely consolidate
and move closer to a uniform standard.
Liza Mark is the Administrative Partner of the Shanghai office of Haynes and Boone LLP and a Partner in the Capital
Markets and Securities Practice Group. She may be contacted at [email protected].
In addition, the consolidation of regulation into the
hands of a single regulator may also accelerate the development of a comprehensive set of rules governing
The author wishes to thank Miles Pan, an Associate in the
Shanghai office of Haynes and Boone LLP, for his research
for this article.
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WSLR
ISSN 1357-0889