CHINA Law and Practice Contributed by: Zhen Chen, Candy Tang, Flora Qian and Yan Zhao, Fangda Partners
Institutional investors such as insurance companies and governmental guidance funds are relatively wel - come in the RMB fund market considering their fund - ing capacity, yet sponsors may find it hard to attract institutional investors’ subscriptions for the funds as well. For instance, insurance companies impose high thresholds on sponsors, including without limitation, AUM of no less than RMB3 billion and registered capital of no less than RMB100 million. Governmen - tal guidance funds typically require sponsors to make return investments into designated local areas and grant them veto rights to certain investment decisions. 4.2 Side Letters Side letters (SLs) are permitted and commonly seen in the PRC private funds market. The beneficial treat - ments provided in the SL should be within the spon - sors’ discretion under the fund contracts and should not have substantial adverse impact on the other investors that are not parties to the SL. AMAC does not require disclosure of SLs. Certain institutional investors, such as insurance com - panies and governmental guidance funds, typically request SLs. Typically, the SL requests are pursuant to the regulations and policies that these institutional investors are subject to. 4.3 Marketing of Alternative Funds to Investors Private funds can only be marketed to qualified inves - tors. Further, the investors’ capacity for risk identi - fication and risk tolerance is assessed by investor suitability processes, and only those whose risk tol - erance level matches the risk level of the fund can be accepted to subscribe for the fund interest (see 4.1 Types of Investors in Alternative Funds ). 4.4 Rules Concerning Marketing of Alternative Funds Only the fund managers duly registered with AMAC and fund placement agents (known as “fund sales institutions” under the regulatory rules) with approval from the CSRC and membership with AMAC may car - ry out marketing and fundraising activities for private funds in China.
Private funds can be marketed solely by private place - ment to the relevant QI as described above. The offer - ing may not be made to the general public, meaning it can only be made to no more than 200 targeted or pre-identified offerees in the PRC. Private one-on- one meetings or meetings with small groups comply with the best practice. Marketing materials typically include PPMs, fund marketing slides, etc. There is no safe harbour of reverse solicitation in Chi - na. There is no specific filing for marketing activities, yet the registered fund manager and licensed place - ment agents must fulfil their ongoing compliance and reporting obligations and maintain their AMAC regis - trations and licences so as to carry out the marketing activities. Further, for PE funds that have a definitive fundraising period, fund managers and placement agents must keep updating the marketing materials and avoid any misrepresentations, misleading infor - mation and omission of material facts. For PSIFs that are open-ended, marketing material updates may be required throughout the entire life of the fund. 4.5 High Net Worth or Retail Investors There is no general solicitation rule with respect to pri - vate funds under the PRC law, and distribution to retail investors that are not QIs is not permitted in China. For admitting HNWIs, channel products such as trust schemes and private asset management schemes sponsored by securities companies or mutual fund companies’ subsidiaries, funds of funds, etc, are often used. However, the use of channel products may be limited by the regulatory rules against multi-layer nest - ing of private products. 4.6 Private Placements Strictly speaking, there is no reverse solicitation rule under the PRC laws, although reverse solicitation is permitted for financial institutions with QDII (qualified domestic institutional investor) licences in practice. Thus, offshore fund sponsors typically talk to QDII licence holders or their QDII products for fundraising of their offshore funds. Regarding marketing activities offshore for onshore funds, offshore feeder funds’ fundraising activities are not governed by PRC law given that the PRC does not
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