Regulatory update in China's Private Fund Industry II

This article is Part II of our regulatory update in China’s Private Fund Industry published in June 2016. Part one can be read here.

Regulatory highlights of the rules on regulating the activities on the promotion and marketing of private funds

Promotion and marketing of a private fund

Qualified investor:  A private fund should only be promoted and marketed to a qualified investor. In addition to other “softer” requirements, a qualified investor should meet the assets threshold listed out below unless it is qualified for certain exemption1 :

• an entity with a net asset of at least RMB10m, and
• an individual investor with financial assets2 of at least RMB3m, or annual income of at least RMB500,000 for the past three years.

Licensing for marketing a private fund:  An entity that undertakes promotion and marketing activities as an independent intermediary must have already obtained a fund marketing licence from the China Securities Regulatory Commission (CSRC) and registration of the Asset Management Association of China (AMAC). Self-promotion by a private fund manager is not subject to such licensing requirement. The current licensing schemes were designed a few years ago which are intended for marketing mutual funds and thus are held by the securities and mutual fund management companies. In other words, only certain securities and mutual fund management companies are qualified to promote and market private funds (that are not managed by them) until further rules are introduced.

Restrictions on marketing activities:  The promotion and marketing activities must not target any retail investors by means of public media, open lectures, social media and alike. And any promised return in the offering materials is strictly prohibited. any information published by the private fund managers to the non-specific public (ie such as the information on its website) is limited to the brand, development strategy, investment strategy, investment team, management team and other information that is made public by the AMAC. There should be no public disclosure of any information about the specific fund product. Even for promotion and marketing to qualified investors, rules on identifying and certifying a qualified investor and requirements on risk disclosures have been tightened up.

Though the regulations didn’t specify the restrictions for marketing activities by a foreign fund manager, the AMAC’s view is that any marketing activities targeted at Chinese investors, or carried out within China’s territory should follow the same rules.

1   Under regulations of PRC, the following entities are deemed as qualified investors even if they do not meet the asset threshold:

• Social security fund, corporate pension fund, charity fund and fund of similar nature
• Investment schemes that have been filed with the AMAC
• Management team and employees that have made investment into the private fund they are managing, and
• Other investors that can be deemed as qualified investors in accordance with the CSRC rules.

2   Under regulations of PRC, financial assets include bank deposits, stock, bonds, futures, and interests in funds, asset management schemes, trust plans, and insurance products.