The Provisional Measures for the Administration of Venture Capital Enterprises (the "Provisional Measures") were jointly promulgated by 10 Mainland Chinese agencies on 15 November 2005 and will take effect from 1 March 2006. The main purpose of this new regulation is to support a domestic government-funded venture capital industry and to share in the dramatic returns some foreign venture capital funds have earned on China investments.
According to Article 1 of the Provisional Measures, their aim is to promote the development of venture capital enterprises ("VCEs"), to standardize their investment activities and to encourage them to invest in small and medium-sized enterprises and in particular in high-tech enterprises.
Main Elements Of The Provisional Measures
Scope of the Provisional Measures
The Provisional Measures establish partially uniform rules for both domestic and foreign-invested VCEs registered and established in the PRC and have flexible eligibility requirements with respect to a VCE’s permitted scope of business, minimum capital contributions, investor criteria and management experience.
Incorporation and registration of VCEs
VCEs may take the form of a limited liability company, a company limited by shares or another enterprise form stipulated by the law.
The VCEs that take the form of a limited liability company or a company limited by shares may appoint another VCE or Venture Capital Management Consultancy Enterprise ("VCMCE") to act as its management consulting company and be responsible for its investment management business. VCEs and VCMCEs are established by simple registration with the State Administration for Industry and Commerce ("SAIC").
VCEs need only be registered with the applicable administrative department for industry and commerce ("AIC") (city, provincial or national, as applicable) by filing certain documents including charter documents, industrial and commercial registrations, business licences, investor and capital commitment information and disclosures on management structure, qualifications and compensation, followed by a post-registration filing process with the applicable administrative authority in charge of VCEs. Foreign-invested VCEs are subject to additional formalities provided under separate legislation.
The Provisional Measures do not require the establishment of VCEs to be approved by government agencies. Instead, they create an autonomous registration mechanism. VCEs can voluntarily register with VCE authorities and accept supervision by the VCE authorities.
VCEs may decide not to register with VCE authorities, but as a result of non-registration, they will not be eligible for certain preferential treatments as stipulated in the Provisional Measures or to be stipulated by relevant government agencies.
Business Scope of VCEs
To be registered by VCE authorities, a VCE must :-
- have been registered with the SAIC or the applicable AIC;
- have a business scope which is limited to (a) venture capital business, (b) being an agent for other venture capital businesses, (c) venture capital consulting, (d) management services for start-up enterprises, and (e) participation in the establishment of a VCE or VCMCE;
- have (a) a paid-up registered capital of no less than RMB 30 million, or (b) have a first instalment of no less than RMB 10 million and all investors have committed to pay up the balance of capital to no less than RMB30 million with 5 years after incorporation;
- have no more than 200 investors (or if it is a limited liability company, then no more than 50 investors). Each single investor should contribute no less than RMB 1 million and all investors should make their capital contributions in cash; and
- have at least 3 senior management members with more than 2 years’ experience in venture capital or other relevant business, or, in the event it entrusts other VCEs or VCMCEs to manage its venture capital business, then such entrusted VCE or VCMCE must have at least 3 senior management members with more than 2 years’ experience who will be specifically responsible for the management of its venture capital business.
Reporting Duties & Annual Inspection
VCEs and their VCMCEs should submit an annual financial report (audited by a CPA) and business report to the relevant authorities within 4 months after each fiscal year and promptly report material events such as any amendment of articles of association, an increase or decrease of capital, a division or merger, change of senior management or VCMCE or liquidation or termination.
Within 5 months of the end of each fiscal year, the relevant authorities will conduct an annual inspection of VCEs and VCMCEs. Serious violation of relevant requirements will be subject to the revocation of registration, and a re-application will not be accepted within 3 years of the revocation.
Preferential Treatment Policies
The Provisional Measures contemplate that national and local governments may establish investment funds to invest in or provide guarantees for VCEs. Moreover, they indicate that the national government will adopt preferential tax policies to support VCEs and will encourage VCEs to increase their investment in small and medium-sized enterprises, especially high-tech enterprises. The Provisional Measures do not provide detailed rules for the implementation of such preferential policies. Relevant government authorities will work on the specific implementing rules.
The Provisional Measures reflect a broad governmental policy to cultivate China's venture capital industry, particularly in the technology sectors. The Provisional Measures are a positive sign that the PRC government is seeking to create a more attractive environment for venture capital investors and the start-up companies in which they invest.
However, while the new rules are positive signs for the development of the venture capital industry in China, regulations enacting the specific tax and legal benefits contemplated by the Provisional Measures have not been promulgated. The actual efficacy of the Venture Capital Measures in promoting the venture capital industry in China will depend to a great extent on the specific measures that will be implemented.
Nevertheless, the Provisional Measures are a positive step in the development of China's onshore venture capital industry.
If you want to receive any further information on the Provisional Measures or have any queries with regard to doing business in China, please contact our China Business Department in Hong Kong or Shanghai.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.