China Securities Regulatory Commission (CSRC) Stepped Up Supervision Of Private Equity Funds And Listed "Ten Prohibitions"

On the whole, after the promulgation of the regulations, no unit or individual may use the words "fund" or "fund management" or similar names to conduct private fund business activities without registration.

On January 8, the China Securities Regulatory Commission (CSRC) issued several regulations on strengthening the supervision of private investment funds (hereinafter referred to as the provisions). In this regard, the CSRC said that the new regulations are aimed at further strengthening the supervision of private funds, cracking down on all kinds of illegal activities, strictly controlling the incremental risk of private funds, resolving the stock risk prudently, improving the development level of industry standards, and protecting the legitimate rights and interests of investors and related parties.

Since it was regulated by the CSRC in 2013, the private fund industry has made rapid development, which plays an important role in promoting the formation of social capital, increasing the proportion of direct financing, promoting scientific and technological innovation, optimizing the structure of investors in the capital market, and serving the development of the real economy. According to the data, by the end of 2020, there were 24600 private fund managers registered with the fund industry association, 96800 private funds were recorded, and the scale of funds under management was 15.97 trillion yuan.

However, with the rapid development of the industry, chaos such as raising funds in public or in disguise, avoiding the requirements of qualified investors, failing to fulfill the obligation of registration and record keeping, complicated group operation and fund pool operation also appear. In recent years, typical risk events such as illegal fund-raising and market manipulation of Fuxing and Jincheng departments have also attracted enough vigilance of supervision.

The relevant person in charge of the CSRC said that it is necessary to comprehensively summarize the occurrence characteristics and disposal experience of risk events in the field of private equity funds, and by reiterating and refining the bottom line requirements of private fund supervision, "let the private equity industry really return to the origin of" private placement "and" investment ", promote the virtuous circle of survival of the fittest, and promote the sustainable development of the industry standard".

Loans, guarantees and real debts are prohibited by law

The biggest focus of the "Regulations" release is the formation of the "ten Musts" prohibitive requirements of private fund managers and practitioners.

On the whole, after the promulgation of the regulations, no unit or individual may use the words "fund" or "fund management" or similar names to conduct private fund business activities without registration.

In terms of business scope, the regulations require managers to focus on the main business of investment management, and carry out fund raising, investment management, consulting services and other businesses around private fund management. They are not allowed to manage private funds that have not been registered according to law, and are not allowed to directly or indirectly engage in private lending, guarantee, factoring, pawn, financial leasing, online lending information intermediary, crowdfunding, off-site capital allocation, etc Business that conflicts with or unrelated to the management of private funds.

Specific to the investment direction of private funds, the regulation also focuses on guiding private funds to return to securities investment and equity investment, reiterating the essence of "sharing interests and sharing risks" in investment activities.

Among them, it is strictly prohibited to use the fund property to engage in non private fund investment activities such as borrowing (deposit) loan, guarantee, public shares and real debt, to invest in credit assets or their right to receive (receive), to undertake investment with unlimited liability, to engage in projects that are prohibited or restricted by the state, as well as projects that do not conform to the national industrial policy, environmental protection policy and land management policy.

But at the same time, in accordance with business practices, the regulations allow private funds to provide short-term loans and guarantees for the invested enterprises for the purpose of equity investment. However, the balance of loan or guarantee shall not exceed 20% of the paid in amount of the private fund.

And private fund managers' equity structure is also required to be clear and stable. The private fund manager shall truthfully disclose its contribution structure at the time of registration, and shall not hold on behalf of others, circulate capital contribution, cross contribution, too many levels, complex structure, etc., and shall not conceal the related relationship or de associate the related relationship.

It is worth mentioning that if the same unit or individual holds or actually controls two or more private fund managers, it is also necessary to explain the rationality and necessity of setting up multiple private fund managers, and fully, timely and accurately disclose the business division of each private fund manager.

The CSRC disclosed that for the managers of collectivized private equity funds who can establish a good internal governance and risk control system, "differentiated supervision can be given to help the best and limit the bad".

Such an incentive system is also reflected in the issue of "dividing the old from the new". According to the rules, the existing private equity fund managers who do not meet the requirements will be classified and dealt with through the implementation of new and old division and the setting of transitional period. At the same time, we will give appropriate differentiated supervision and self-discipline arrangements to private fund managers who take the initiative to complete the rectification in advance.

Fund pool business and self financing shall not be carried out

Based on the nature of "non-public offering" of private funds, the regulation also details and restates the requirements of prohibited behaviors in the process of private fund raising.

It includes not providing multi person patchwork, capital borrowing and lending, no publicity and promotion to unspecified objects, no direct or indirect commitment to investors to guarantee the principal and earnings, no exaggeration and false publicity, no establishment of branches for the purpose of fund raising activities, and breaking through the limit on the number of investors.

What is worth noting is that in terms of the scope of compliance investors, the provisions state that asset management products, qualified foreign institutional investors and RMB qualified foreign institutional investors issued by institutions under the supervision of the financial supervision and regulation department of the State Council will no longer go through the inspection of final investors.

"This means that QFII and rqfii will no longer pass through the verification in the future, and the number of investors will not be combined to calculate, which is a big advantage for private equity funds to introduce long-term funds." There are private fund practitioners in Beijing.

In addition to the prohibited behaviors in the process of private fund raising, the regulations also listed 13 prohibited behaviors of private fund managers and their employees, including separate management, separate account establishment and separate accounting for different private funds; carrying out or participating in fund pool business with the characteristics of rolling issue, collective operation, maturity mismatch, separate pricing, etc.; in order to obtain private funds For the purpose of financial assets, private fund assets are used to directly or indirectly invest in private fund managers, controlling shareholders, actual controllers and their actual controlled enterprises or projects.

"Private funds will enter the era of strong supervision." Huabao Securities believes that the formulation of the "Regulations" is mainly to regulate the business activities of private investment funds, further strengthen the supervision of private investment funds, crack down on all kinds of illegal behaviors, strictly control the incremental risk of private equity funds, safely resolve the stock risk of private funds, improve the development level of the industry, protect the legitimate rights and interests of investors and related parties, and improve the overall private placement The supervision system of the fund.

The CSRC also said that in the next step, it will further improve the legal system of private equity funds and consolidate the institutional basis for strengthening the supervision of private funds in accordance with the overall requirements of "system building, non intervention and zero tolerance". At the same time, China Securities Regulatory Commission will increase policy support, strengthen the supervision of private funds and promote the sustainable development of industry norms, and further play the important role of private funds in increasing the proportion of direct financing, supporting entrepreneurship and innovation, serving the real economy and wealth management of residents.

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