Introduction: The Asset Management Association of China (the “Association”) officially issued the updated Measures for Registration and Filing of Private Investment Funds (hereinafter referred to as “the Measures”) and the supporting guidelines on February 24, 2023, which will be formally implemented from May 1, 2023. This means that the new regulations for registration and filing of private investment funds have formally come into effect. What are the highlights and key points of the updated regulations? Lawyer ZHENG’s team has carefully sorted out and interpreted the relevant contents and divided them into two parts, i.e. manager registration and private investment funds filing, for your reference.
1 | Part.1 、Requirements for registration time, business premises and full-time employees of the manager
Requirements for registration time of the manager
According to Article 2 of the Private Fund Manager Registration Guidelines No.1, companies and partnerships applying for registration as private fund managers shall be established for the purpose of carrying out private fund management business and shall apply for registration as private fund managers within 12 months from the date of industrial and commercial registration of the market entity, except in cases where registration needs to be suspended due to changes in the policies of relevant state departments and other circumstances.
Requirements for business premises
According to Article 8 of the Private Fund Manager Registration Guidelines No.1, firstly, a private fund manager shall have an independent and stable business premise, and shall not use premises with insufficient stability such as shared spaces as business premises, and shall not have mixed offices with its shareholders, partners, actual controllers or related parties. Secondly, if the business premises are leased, the remaining lease period shall be not less than 12 months from the date of application for registration, unless there are reasonable grounds. Thirdly, if the registered office of the private fund manager is separated from its place of business, it should be reasonable and justified.
Requirements for the number of full-time employees
Article 8(1)(4) of the Measures specifies that the private fund manager shall have at least five full-time employees, where “full-time employees” refer to regular employees who have signed employment contracts and paid social security with the manager, foreign employees who have signed employment contracts or labour contracts, rehire-after-retirement employees, and senior officers appointed by state organs, public institutions, enterprises controlled by the government and its authorized agencies.
Requirements for the experience of the legal representative, head of compliance and risk control and senior officers responsible for investment management of the manager
Requirements for the experience of the legal representative, executive partner or its delegated representative, principal person in charge of operation and management and senior officers responsible for investment management: According to Article 10 of the Measures, the legal representative, executive partner or its delegated representative, principal person in charge of operation and management and senior officers responsible for investment management of private fund managers (including private securities investment funds and equity investment funds) shall have at least 5 years of relevant working experience. Requirements for the experience of private securities investment fund managers: at least 5 years of working experience in securities, funds and futures investment management. Requirements for the experience of private equity fund managers: at least 5 years of experience in equity investment management or related industry management.
Requirements for the experience of head of compliance and risk control: According to Article 10 of the Measures, the head of compliance and risk control of a private investment fund shall have at least three years of experience in investment-related law, accounting, auditing and supervision, or in compliance, risk control, supervision and self-regulatory management in the asset management industry. Here is a special reminder that the Association clearly stipulates that the head of compliance and risk control of a private investment fund shall not hold the position of general manager, executive director or chairman of the board, executive partner or their delegated representatives of such private investment fund.
Requirements for the experience of senior officers responsible for investment management: According to Article 10 of the Measures, senior officers responsible for investment management of a private investment fund shall possess the qualified investment management performance. For example, for the senior officers responsible for investment of private securities investment funds, investment performance shall cover more than 2 consecutive years within the last 10 years, and the management scale of a single product or account shall not be less than RMB20 million. For the senior officers responsible for investment of private equity investment funds, investment performance shall be at least 2 leading investment projects in the equity of unlisted enterprises within the last 10 years, with a total investment amount of not less than RMB30 million, and the fund has exited through the initial public offering and listing, equity mergers and acquisitions or equity transfer of the enterprise in at least 1 project, or other qualified investment management performance.
Restrictions on the part-time employment of senior officers of private investment funds
According to Articles 11 and 12 of the Measures and the supporting documents, the legal representatives, senior officers, executive partners or their delegated representatives of private investment fund managers are provided with comprehensive and detailed regulations on part-time employment, clearly emphasizing that legal persons and senior officers of private investment fund managers shall ensure that they have sufficient time and energy to perform their duties and that their part-time employment shall be reasonable. The details are as follows:
Restrictions on the part-time employment of legal representatives, senior officers, executive partners or their delegated representatives of private investment fund managers: Such subjects shall not hold part-time employment in un-related private investment fund managers, conflicting institutions and other institutions with which they have a conflict of interest, or become their controlling shareholders, actual controllers or general partners.
Restrictions on the part-time employment of the head of compliance and risk control: The head of compliance and risk control shall independently perform the duties of reviewing, supervising and inspecting the management compliance of private investment fund managers, and shall not engage in investment management business or hold positions that conflict with the duties of compliance and risk control or hold part-time employment in other profit-making institutions. However, if the same controlling shareholder or actual controller controls more than 2 private investment funds, there are separate regulations.
Restrictions on other practitioners and their exceptions: Such persons shall engage in private investment business activities in the name of their institution and shall not hold part-time employment in other profit-making institutions.
Exceptions: Article 17 of the Measures stipulates that if there are separate regulations for the case that the same controlling shareholder or actual controller of the above persons controls more than 2 private investment funds, the separate regulations shall prevail.
Circumstances that do not fall under the scope of part-time employment: According to Article 10 of the Private Fund Manager Registration Guidelines No.3, there are four types of circumstances that do not fall under the scope of part-time employment as stipulated in Articles 11 and 12 of the Measures: (1) serving in non-profit organizations such as universities, research institutes, social organizations and social service institutions; (2) serving as directors and supervisors in other enterprises; (3) serving in the private investment funds under management; (4) other circumstances as determined by the Association.
Requirements for the stability of managers’ personnel
According to Article 21 of the Measures, private investment fund managers shall maintain the adequacy and stability of the management team and relevant personnel. Senior officers shall continuously meet the relevant job requirements of the Measures. After the departure of the original senior officers, the manager shall, in accordance with the provisions of the Articles of Association or the partnership agreement, appoint a qualified person to perform the duties in their place and appoint a senior officer who meets the job requirements within six months, and shall not affect the effective operation of internal governance and business operations due to long-term absence. Meanwhile, it is specifically reminded that the legal representative, the executive partner or its delegated representative, the principal person in charge of operation and management, the senior officers responsible for investment management and the head of compliance and risk control shall not be replaced until the first private investment fund has completed the filing procedures.
VII. Requirement that the manager shall not employ affiliated persons
To crack down on managers arranging affiliated practitioners to meet the qualification requirements for private investment fund managers’ professionals, Article 10 of the Private Equity Fund Manager Registration Guidelines No.3 specifies that:
Private investment fund managers shall not employ affiliated persons and shall not apply for registration as private investment fund managers by means of falsely employing personnel, etc.
If a private investment fund manager employs a person who frequently changes his/her job position within a short period of time as a senior manager responsible for investment management, it shall conduct due diligence on his/her integrity record, professional conduct and ethics.
If the senior officers of a private investment fund manager have worked for more than 3 unrelated entities within 24 months, or has provided the same performance materials for more than 2 registered private investment fund managers within 24 months, the aforementioned work experience and investment performance will not be recognized.
2 | Part.2、Requirements for private investment fund managers, funders, controlling shareholders and actual controllers
Requirements for paid-up capital
Article 8(1)(1) of the Measures clearly stipulates that the paid-up monetary capital of a private investment fund manager shall not be less than RMB10 million or its equivalent in freely convertible currency, and shall be subject to any other provisions for managers specializing in the management of venture capital funds. This article clearly requires the minimum capital requirement of the manager, and requires that the funder shall contribute in currency, not in non-monetary property; foreign funders shall contribute in freely convertible currency; shareholders shall not make false contributions, withdraw capital, etc.
Requirements for shareholding structure
Compared with the previous revised draft, Article 8 of the official draft of the Measures has added the requirement of clear and stable capital contribution structure for private investment fund managers (Article 8(1)(2) of the Measures), and that their partners and actual controllers shall have good credit records, and their controlling shareholders, actual controllers and general partners shall have relevant experience that meets the requirements. The new “clear and stable capital contribution structure” here mainly refers to the fact that the shareholding structure of the manager does not have too many layers or complex structures, and that no nested structures of more than two layers can be established through special purpose vehicles without reasonable grounds. Individuals or organizations that do not meet these requirements cannot act as controlling shareholders, actual controllers and general partners of a private investment fund manager.
Specific requirements for the shareholding of managers
Article 8(1)(3) of the Measures clearly stipulates that the legal representative, the executive partner or its delegated representative, and the senior officers responsible for investment management shall all directly or indirectly hold a certain percentage of the equity or property share of the manager, and their total paid-up capital shall not be less than 20% of the paid-up capital of the private investment fund manager or not less than 20% (i.e. not less than RMB2 million) of the minimum paid-up monetary capital (RMB10 million) of the private investment fund manager as stipulated in Article 8(1)(1) of the Measures.
Clarify the negative list circumstances for the shareholders, partners and actual controllers of managers
Articles 9 and 15 of the Measures list tens of negative list circumstances in which shareholders, partners, or actual controllers of managers are prohibited from acting as shareholders, partners, or actual controllers of private investment fund managers, including: non-legitimate own capital contributions, poor governance structure and irregular operations, inappropriate asset-liability and leverage ratios, poor financial condition, lack of sustainable capital replenishment capacity, no operational management or relevant experience in asset management, investment, related industries, etc./or less than 5 years of such experience, or having served in an unrelated private investment fund manager/having engaged in conflict business in the last 5 years, violating the law, having been subject to administrative supervision/disciplinary action, having been banned from the market, having had its registration revoked/cancelled/terminated, having significant risks, having a large amount of outstanding debts due, having a bad credit record, etc.
Requirements for specific foreign capital ratio in private securities fund managers
According to Article 14 of the Private Equity Fund Manager Registration Guidelines No.1, the private securities fund manager shall comply with the registration requirements as stipulated in Article 14 of the Measures and perform the change procedures to the Association in accordance with the regulations if its foreign capital ratio is not less than 25% due to the change of its funder or the proportion of capital contribution or the change of nationality of the natural person funder, etc.
Restrictions on capital contributions for funders which are asset management products
According to Article 5 of the Private Equity Fund Manager Registration Guidelines No.2, the actual controller of a private investment fund manager shall not be an asset management product. Asset management products shall not be the main funder to the private investment fund manager, and its total direct or indirect contribution to the manager shall not be higher than 25%, except for those managers funded by governments at or above the provincial level and their authorized institutions.
Restrictions on the capital contribution ratio from funders to conflict businesses
According to Article 6 of the Private Fund Manager Registration Guideline No.2, if a funder of a private investment fund manager engages in conflict business, its direct or indirect share of equity or property of such manager shall not exceed 25% in aggregate.
Restrictions on transfers by controlling shareholders, actual controllers and general partners
According to Article 20 of the Measures, the equity, property share or effective control held by the controlling shareholder, actual controller or general partner of a private investment fund manager shall not be transferred within three years from the date of registration or change of registration, except under one of the following five circumstances: (1) the equity or property share is administratively transferred or changed in accordance with the regulations; (2) the equity or property share is transferred between different entities controlled by the same actual controller; (3) the private investment fund manager implements employee equity incentives without changing the status of the actual controller; (4) the equity or property share is acquired for legal reasons such as inheritance; (5) other circumstances as stipulated by laws, administrative regulations, the China Securities Regulatory Commission and the Association.
3 | Part.3、Requirements for a material change of information
Requirements for submitting legal opinions on changes: To crack down on the trading of “private investment shell resources”, Article 48 of the Measures stipulates that in the event of a change in the controlling shareholder, actual controller or general partner of a private investment fund manager, the manager shall, within 30 working days from the date of the change, complete the change procedures with the Association and submit a special legal opinion on the change.
Requirement of having a scale of not less than RMB30 million for the 12 months prior to the change of effective control. According to Article 48 of the Measures, if there is a change in the effective control of a private investment fund manager, the scale of management for the 12 months prior to the change shall be continuously not less than RMB30 million.
4 | Part.4、Requirements for the information reporting of private investment fund managers
Requirements for the materials and information that should be submitted for registration and filing: such materials and information include but not limited to the manager’s identity documents, relevant materials on registered capital and paid-up capital and financial status, articles of association or partnership agreement, information and qualification documents of shareholders or property share holders and key personnel of the manager, information on the funders, information on related parties, the manager’s system documents, audit reports and legal opinions, the commitment letters from the actual controller, funders, senior officers and the manager, etc.
The new regulations add the requirement to submit financial reports audited by an accounting firm filed with the China Securities Regulatory Commission and clarify that legal opinions are required to be issued by a law firm filed with the China Securities Regulatory Commission.
5 | Part.5、Transitional arrangements for the implementation of the new regulations
The new regulations shall come into force on May 1, 2023 and the Preamble Notice to the Measures specifies the following transitional arrangements:
(I) For registration, filing and information changes submitted prior to the implementation of the Measures, the Association shall handle them in accordance with the existing rules. For registration, filing and information changes submitted after the implementation of the Measures, the Association shall handle them in accordance with the Measures.
(II) Where a registered private investment fund manager submits a change of registration and filing information other than the effective control after the implementation of the Measures, such change shall comply with the provisions of the Measures. If a private investment fund manager submits a change of effective control, the changed private investment fund manager shall fully comply with the registration requirements of the Measures.
(III) With effect from May 1, 2023, the registration, filing and information changes that have been submitted but not yet completed before the implementation of the Measures shall be handled by the Association in accordance with the Measures.
