Investment funds in China are mainly governed by The Law of People’s Republic of China on Securities Investment Funds (PRC Securities Investment Funds Law) promulgated initially by the Standing Committee of the National People’s Congress (NPC) in March 2003 and amended in December 2012 (Amended Law). The Amended Law represents a comprehensive effort to regulate both public and private investment funds in China which include the proposed bringing of private investment funds under the supervision of the China Securities and Regulation Commission (CSRC).

Regulation of private investment funds in China

Before the amendment, the Securities Investment Fund Law only regulated public funds, which left the increasingly popular private investment funds in a legal limbo. Private investment funds in China are now governed by the Amended Law pursuant to which a private investment fund is only permitted to raise funds from no more than 200 qualified investors who are required to satisfy specific income or asset requirements provided by CSRC. Private investment funds are not permitted to advertise in public.

As compared with a public fund, a private fund will be subject to relatively relaxed requirements. Depending on the amount of capital proposed to be raised, and the number of unit holders of the fund, the fund manager of a private investment fund is only required to register with the CSRC or a fund industry association and prior approval from the CSRC is not required.

While the launching of a public fund requires pre-filing with the CSRC, under the proposed amendments, fund raising of a private investment fund is only subject to post-filing requirements required to be filed with the CSRC or a fund industry association.

A private fund manager is also permitted to manage a public fund, subject to the prior approval of the CSRC.

Introduction of new forms of investment funds in China

In addition to the existing contractual form, the Amended Law introduces two additional forms of funds:

• committee form (available to both a public fund and a private fund); and
• unlimited liability form (available to a private fund only).

Under the committee form, a committee as a standing body, for the purpose of supervising the day-to-day operation of the fund manager and the custodian. In an unlimited liability form fund, it is required that the fund manager or an institution with a controlling stake in the fund manager to bear unlimited liability for the liabilities of the fund.

Types of permitted investment products under the PRC Securities Investment Funds Law expanded

In addition to listed shares and bonds, a public fund is permitted to further invest in other types of securities and investment products (including derivatives) as determined by the CSRC.