Chinese regulators poised to clamp down on illegal fundraising

Frank Han, executive director of Bohai Industrial Investment Fund Management, told the AVCJ Investment Summit in Hong Kong earlier this month that there has been a lot of illegal fundraising from retail investors who don't fully understand the asset class. He warned that the government would step in if it continued.

Local media cited a NDRC official as saying there have been 1,059 cases of private equity firms breaching fundraising regulations this year. Many firms are exploiting a loophole that allows them to work around rules that cap the number of LPs in a fund. There should be no more than 50 investors in a standard fund and up to 200 in a fund raised through a trust company. Private equity firms are signing up other funds as LPs, indirectly exposing them to many more investors.

Banks and other financial institutions are central to the deceit as they pool money from investors and set up funds, which then become LPs in private equity funds, according to The 21st Century Business Herald.

The NDRC is expected to try and close this loophole through the implementation of new regulations. It is also planning to require all funds with more than RMB500 million ($78 million) in assets to be registered. This policy only exists on a pilot basis in certain regions, but the NDRC is looking at a nationwide rollout.

Some local governments, such as Tianjin, have already ordered private equity firms to register with the authorities and only use local banks as custodians of their funds. These custodians are required to submit reports on a quarterly and monthly basis detailing funds' foreign investments and changes in foreign capital.

The use of trusts to invest in funds, meanwhile, remains a contentious area. By operating through these entities, which have wide remits and are notoriously difficult to regulate, investors can take steps to avoid paying tax on their profits and foreigners can gain exposure to sectors that are generally off limits to them.

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• Topics
• Regulation
• LPs
• Fundraising
• Greater China
• Renminbi fund
• China
• NDRC
• Fundraising
• regulation
• Bohai Industrial Investment Fund Management