The Administrative Measures provide detailed rules in terms of the definition of fundraising activities, qualification requirements for fundraising institutions, general principles, specific marketing and promotional activities, and protection of investors. Once promulgated, the Administrative Measures will become important self-disciplinary rules governing the private funds industry, and their implementation will further the development of the China private funds industry in the long run. Below is an overview of certain key points of the Administrative Measures.
Qualifications of Fundraising Institutions. The Administrative Measures define the scope of fundraising activities, and specify the qualification requirements of institutions and individuals engaged in private investment fundraising. Fundraising is defined to include the promotion of funds, distribution of fund units, and handling of fund subscriptions and redemptions.
For fundraising institutions, only two types of institutions are allowed to engage in private fundraising: (1) private fund managers registered with the AMAC or (2) institutions that both are registered with the China Securities Regulatory Commission (“CSRC”) to carry on the private fund distribution business and are members of the AMAC. This means that when private fund managers intend to delegate the distribution of private funds to a third party, they need to examine whether such third party distributor is both registered with the CSRC and is a member of the AMAC. Individuals employed by fundraising institutions that are engaged in fundraising must have obtained the requisite qualifications for carrying on the fund business.
Duties of Fundraising Institutions. The Administrative Measures specify that fundraising institutions owe to investors the duties of care, examination of investor suitability, information disclosure, confidentiality, and preservation of documents (i.e., documents shall be maintained for no less than 10 years from the date of liquidation of the relevant fund). If a private fund manager delegates fund distribution to a third party, it shall enter into a written fund distribution agreement with the fund distributor and the fund distributor shall bear the relevant responsibilities according to law and by agreement. Such responsibilities include (1) completing an “investor examination and assessment process”, (2) complying with the relevant marketing and promotion limitations, (3) providing “explanations to investors”, and (4) completing a “qualified investor confirmation process”.
The above provisions provide “double protection” for investors. That is, both the private fund managers and distributors, first, shall assume the above investor-related legal obligations and responsibilities, and, second, may allocate and specify their own obligations by signing the distribution agreements. However, the legal obligations owed by the private fund managers to investors will not be discharged by such delegation.
No Split. In response to the current chaotic phenomena of private fundraising, the Administrative Measures explicitly prohibit splitting and transferring private fund units or their rights to earnings, which actions covertly elude the legal requirement that private funds can only be sold to qualified investors. Such provision specifically responds to the existing violations in the current market.
Custody of Raised Funds. The Administrative Measures require private fund managers to open special accounts for private fundraising and settlement under the names of the private fund manager as well as either (1) the China Securities Depository and Clearing Company Limited or (2) a commercial bank or securities company that is qualified to engage in the fund distribution business. However, if one of such commercial banks or securities companies also concurrently acts as a fund distributor, it may, on its own behalf, open the special account. Such accounts aim to safeguard investors’ funds prior to the transfer of such funds into the relevant fund account or the formal custodian account.
Limitations on Marketing and Promotion. The Administrative Measures expressly limit the scope of public marketing and promotion by fundraising institutions to brands, development strategies, investment strategies of private fund managers and information on funds published by AMAC. Such public materials shall not contain any marketing or promotion of any specific fund products. The Administrative Measures also require, prior to the commencement of any marketing or promotional activities, the completion of an “investor examination and assessment process”, and further provide guidelines on the content and format of the questionnaires, as well as list prohibited promotional behaviors and methods.
Qualified Investor Confirmation Process. The Administrative Measures detail the requirements for the investor suitability test and require fundraising institutions to examine the investors’ suitability by requesting and reviewing the financial asset certificates of the investors. Investors are also protected by provisions specifying that the cooling period for investors shall be no less than one day and that, without going through a confirmation process via a return visit, private fund managers shall not enter into the relevant fund contract.
In terms of risk disclosure, the Administrative Measures provide guidelines on the content and format of the risk disclosure letter. The special risks that must be covered include where (1) the fund contract diverges from the AMAC’s guidelines on fund contracts, (2) no custodian is provided for the fund, (3) fundraising is delegated to a third party, and (4) third party investment advisors are engaged for the fund.
To summarize, the Administrative Measures regulate the fundraising of private funds in a comprehensive and concrete manner. Private fund management and distribution institutions shall, therefore, make adjustments in accordance with the Administrative Measures ahead of time, and strictly comply with such rules after they are formally put into place.