Private Equity Investment Fund Awaits Challenges in Double-Filing Regulatory Industry (VC298)

The tree wants to be quiet and the wind can't stop!
The Securities Investment Fund Law (Revised Draft Consultation Draft) (hereinafter referred to as the "Solicitation Draft") drafted by the NPC Finance and Economics Committee was issued to relevant companies and ministries for nearly a month. Due to the inclusion of private equity investment funds in the scope of supervision, This consultation draft is also quietly circulating in the domestic PE investment field ...
Similar to the "Notice on Further Regulating the Development and Filing Management of Equity Investment Enterprises in Pilot Areas" (hereinafter referred to as "Notice") issued by the National Development and Reform Commission, the draft for comments also raises the operating threshold for domestic equity investment funds-to adapt to them In addition, domestic PE institutions also need to make difficult “adjustments” in industry practices and compliance operations.
"The supervision of domestic equity investment funds has just started, and there are indeed many problems that need to be reconciled between the relevant provisions and the actual operation of the fund." A person close to the drafting group for the revision of the Fund Law pointed out that "the current consultation draft has basically ended the consultation process. It will be submitted to the NPC Finance and Economics Committee for deliberation, and there should be more discussions on PE regulation. "
Double filing
Private equity fund supervision has been raised to an unprecedented height.
The draft for solicitation specifically lists the chapter of "Special Provisions for Non-Public Fund Raising" and stipulates that fund managers should apply for registration with the securities regulatory authority under the State Council in accordance with the prescribed conditions, but the amount of funds raised by the funds managed by the fund managers or their funds If the number of share holders is less than the prescribed amount, registration is exempted.
However, there is no clear statement about the "prescribed conditions" referred to in the above clauses. "We still need to wait for the implementation rules." The above-mentioned person close to the drafting group of the Fund Law revision pointed out.
In contrast, the NDRC opened a clear PE regulatory threshold at the end of January. It is stipulated that all equity investment enterprises registered in the industrial and commercial administrations in the pilot areas, no matter the actual or committed investment quota, as long as they reach 500 million yuan, they must go to the National Development and Reform Commission for record and be managed.
"The draft for solicitation puts corporate funds and limited partnership funds into the scope of supervision, which means that most domestic institutions are facing double-headed filings," said the head of a domestic equity investment institution.
But in the opinion of most PE people, the draft for solicitation and the "Notice" reflect different ways of domestic PE supervision.
"In order to prevent the short operation of the filing fund, the NDRC mainly supervises the safety of funds by investing in equity investment funds." Many heads of domestic equity investment institutions said to emphasize.
The soliciting opinions are more focused on "starting from people".
The draft stipulates that when applying for registration, the fund manager should submit the basic information of the fund manager ’s professional qualifications, registered capital, internal compliance system, risk control system, information disclosure arrangement and fund security. Once the registration fails or is not registered in time, the relevant departments will take orders to reduce the size of the fund assets or the number of customers within a time limit, and will not pass the annual inspection and other measures.
"This has a great impact on the pace of investment in subsequent projects and the IPO of investment projects." However, the person in charge of the domestic equity investment institution mentioned above is more concerned about the tax burden of PE.
At present, domestic PE is dominated by the corporate system and the limited partnership system. Compared with the trust system, private placement does not need to bear business tax and withholding personal income tax. The former is facing a high tax burden. Among them, in addition to the business tax, the limited partnership equity investment fund, the investor ’s personal income tax is 20%, and the fund manager ’s tax burden ranges from 5% to 35%.
"Most limited partnership funds are striving for more local tax incentives, and the tax burdens borne by different PEs are actually different." A limited partnership PE partner said.
"The tax burden of PE should not fall under the supervision of the Fund Law." The above-mentioned people close to the drafting group of the Fund Law said that the current registration and taxation of limited partnership enterprises are mainly managed by the local industry and commerce and tax authorities, and the Fund Law will bring it into supervision. , Also need to consult and communicate with relevant departments.
Industry practices are challenged
Inadvertently, the consultation draft may affect certain established investment practices of domestic equity investment funds.
In China, equity investment fund management teams and investment projects are quite common. It is understood that more than half of the interviewees of local VC / PE institutions indicated that their institutions allow employees to participate in follow-up investment in investment projects, of which about half of the investment income of investment directors and fund partners accounted for 40% to 50% of the overall income. The remaining follow-up investment accounted for more than 90%.
"Following investment is mainly to better allow the fund management team and fund investors to share risks and share benefits," said a domestic venture capital partner. At present, this organization stipulates that for every investment in a project equity, the fund management team involved in the project's investment decision must invest and invest in it, accounting for 1% of the investment. "This may conflict with the relevant provisions of the consultation draft."
The relevant clause he said is that fund managers and practitioners shall not confuse the fund manager ’s inherent property, the practitioner ’s own property or the property of others with the fund property to engage in securities investment.
"The worst case is that the equity held by the fund management team must be transferred out." He said that similar follow-up investment in domestic equity investment is also controversial. For example, when members of the fund management team participate in the equity follow-up investment of a project with personal funds, May invest extra energy in project investment management, causing the "fund management team to treat the different assets of the funds it manages unfairly", which is also expressly prohibited in the draft for comments.
More established investment practices are also awaiting the "recognition" and "protection" of the consultation draft. Such as the KEY PERSON clause, that if the fund partner leaves, the funder will use the fund investment advisory committee to form a "right" to decide whether to interrupt the original investment commitment; and when the equity investment fund investment fund manager previously invested in an individual's enterprise, How to avoid related transaction risks.
Moreover, in order to reduce the "moral hazard" given by fund managers to the loss caused by the capital, the draft for comments also stipulates that the fund manager should withdraw the risk reserve from the fund management fee income, when the fund manager violates the laws and regulations, violates the fund contract, etc. For reasons that cause losses to the rights and interests of fund holders, the risk reserve will be used first to compensate.
"But according to international practice, general managers of limited partnership funds only need to invest 1% to 2% of the funds in equity investment funds as a deposit of confidence in the investor's investment. Whether additional risk reserves are needed is debatable." A foreign-funded limited partnership fund partner said.
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