CSRC Became Sole Regulator of PE Industry

by Sheppard Mullin Richter & Hampton LLP

[author: Emily Tsai]

The long fight between China’s regulatory agencies for the private equity (PE) and venture capital (VC) industry has finally been concluded. By a notice on Division of Duties in Private Equity Fund Administration promulgated by the State Commission Office for Public Sector Reform ("SCOPSR") on June 27, 2013 ("Notice”), the China Securities Regulatory Commission ("CSRC") is designated as the sole regulator of China’s PE and VC industry.

The CSRC is authorized by SCOPSR to carry out appropriate regulation over the PE and VC industry, in an effort to protect the interest of investors.

"Initial public offerings are a main exit way for companies with investments from PE and VC companies, and the CSRC is at an appropriate position to regulate them," said an industry insider.

The sector was previously regulated by the CSRC and the National Development and Reform Commission ("NDRC"), causing disunified and unstable regulatory framework. In fact, there has not been any legislation clarifying the corporate nature of PE/VC firms. NDRC requires mandatory registration of PE firms, while the registration of VC firms is voluntary. The criteria in differentiating between the two however, is merely the registered name of the entity, or the general description of its registered business scope. The lack of comprehensive and systematic definition has thus led to the confusing regulatory regime of the industry.

Further adding to the confusion, in February, the CSRC released a notice stating that PE and VC firms may engage in public and private fund management businesses, which may be implemented on June 1. However, the NDRC later promulgated a regulation in March stipulating that PE and VC companies are not allowed invest in public-offered funds.

In order to clarify the situation and standardize the administration of the industry, China’s legislators tried earlier to include PE/VC regulatory provisions into the 2012 revisions of the PRC Securities Investment Fund Law – a controversial move which ended up with the joint petition of 25 PE/VC industry associations to oppose the proposal. By the time of the third draft in December, 2012, the relevant provisions were removed from the proposal. As a result of the compromise, no legislation was passed regarding the regulation of the industry and the chaos continued, until June when the Notice announced the CSRC as the sole regulator.

Under the new administrative system, the NDRC is designated to compile policies and measures for the development of PE and VC industry as well as jointly set investment criteria for PE and VC funds with related government departments.

The SCOPSR also calls for the CSRC and the NDRC to establish a "working mechanism based on coordination and collaboration and the transparency of information".

Many industry players welcome the move, agreeing that as the country’s top economic planning agency, the NDRC should focus more on macro issues and reduce intervention in details.

Liu Jianjun, director of CSRC's Department of Fiscal and Financial Affairs, a regulatory arm responsible for the PE and VC sector, was transferred to the CSRC's fund department last month.

The CSRC will establish a regulatory department for the PE and VC industry before long, said an industry insider, adding that Liu will head the department and core function of the department is to implement regulation on the PE and VC industry.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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