Newsletter
PRC PROMULGATES THE REGULATIONS GOVERNING FOREIGN-INVESTED VENTURE CAPITAL ENTERPRISES
Venture capital investment has attracted spe-cial attention in PRC such that the PRC Ministry of Foreign Trade and Economic Cooperation (MFTEC) promulgated the Regulations Governing Venture Capital En-terprises on 30 January 2003 and scheduled 1 March 2003 as the commencement date of their implementation.
Venture capital investment enterprises (VC Enterprises) invested by foreigners are divided into two kinds:
1.Non-corporate VC Enterprises
In principle, all the investors should be jointly or severally liable for the debts of a VC Enterprise.
It is also acceptable for a Requisite In-vestor (as defined below) to assume joint and several liabilities while the other investors are only liable for a VC Enterprise's debt only to the extent of their respective investment amounts.
2.Corporate VC Enterprises
The investors are liable for a VC En-terprise's debt only to the extent of their respective investment amounts.
1.Minimum Capital and Investment
The total capital investment to form a Non-corporate VC Enterprise should be at least US$10 million while that for a Corporate VC Enterprise should be at least US$5 million.
A VC Enterprise should be organized by 2 to 50 investors of whom, at least one should act as the Requisite Investor having certain qualifications as re-quired by the regulations, such as that the aggregate amount of the fund managed by such investor for the past these years should reach US$ 100 mil-lion, of which US$ 50 million should have been invested in venture capital business.
If the Requisite Investor is a PRC na-tional, the accumulated amount of the fund managed by him should be not less than RMB 100 million, of which RMB50 million should have been in-vested in venture capital business. As provided in the regulations, the mini-mum amount of capital investment of an investor should be US$1 million, while the Requisite Investor should make capital investment representing at least 30% of the total capital investment amount of a VC Enterprise.
Investors may pay in their capital in-vestments in installments within a pe-riod of five years. The VC Enterprise [Joint Venture] Agreement should contain relevant provisions with respect to the amount of each installment, payment schedule and the liabilities for breach. Investors are not allowed to reduce their committed capital invest-ments. However, if the minimum capital requirement of US$ 10 million is not affected by a reduction of the committed amount of capital invest-ment, consent of a majority of the gen-eral investors and of the Requisite In-vestor have been granted, and the competent authorities have approved the same, the investors may reduce their commitment.
2.VC Management and Administration
The VC management and administration body can be classified into four types in accordance with the nature of a VC En-terprise:(a)Joint Management Committee
This type of management organiza-tion has been adopted by a Non-corporate VC Enterprises. The committee is organized by the in-vestors pursuant to the VC Enter-prise [Joint Venture] Agreement and its Articles of Incorporation. The committee represents the investors in managing a VC Enterprise and making investment decisions.
(b)Board of Directors
This type of management organiza-tion has been adopted by a Corporate VC Enterprises. The board is or-ganized by the investors in accor-dance with the VC Enterprise [Joint Venture] Agreement and its Articles of Incorporation and represents the investors in managing a VC Enter-prise and making investment deci-sions.
(c)Daily Management Organization
The Joint Management Committee or the Board of Directors should set up a daily management organization (team) and delegate such organiza-tion with the authority to administer a VC Enterprise's daily and regular operations. This organization should implement the investment decisions made by the Joint Management Committee or the Board of Direc-tors.
(d)Venture Capital Investment Manage-ment Enterprise (VC Management En-terprise)
VC Management Enterprise is a corporate entity entrusted by a VC Enterprise to handle and administer its daily business. In addition to certain qualifications a VC Man-agement Enterprise should have a capital of at least RMB1 million or the equivalent in foreign currency. Either a local company, a foreign invested enterprise or an off-shore company engaged in VC manage-ment business may act as a VC Management Enterprise.
3.Business Scope of a VC Enterprise
A VC Enterprise's core business is to invest with equity fund in unlisted high-tech companies by acquiring their shares, and providing venture capital investment consultation and manage-ment services. To dearly distinguish a VC Enterprise from a general invest-ment company, the regulations restrict a VC Enterprises from conducting the following investments:(a)To invest in business entities or busi-ness fields in which foreign investors are prohibited from investing;
(b)To invest in portfolios issued by listed companies;
(c)To invest in real properties directly or indirectly;
(d)To invest in the form of a loan;
(e)To use non-equity fund for investment;
(f)To provide loan or guaranty for the benefit of a third party except for in-vestment in portfolios such as con-vertible bonds or corporate bonds is-sued by a company in which a VC En-terprise has equity investment for a year or more;
(g)Other investment activities restricted by the relevant laws, regulations or VC investment contracts.
The term for the business operation of a VC Enterprise is 12 years and is extend-able if approval on extension is granted by the competent authorities.
In general, a VC Enterprise should invest in high-tech companies in accordance with the Regulations Governing Foreign In-vestment Directions and the Categories of and Guidance for Industries Invested by Foreign Enterprises. The investments by VC Enterprises are viewed as investments by foreign investors.
If a company invested in by a VC Enter-prise falls into the categories of industries that are encouraged or permitted, the VC Enterprise needs only to report to the local foreign trade and economic cooperation division for recordation. However if the industry concerned falls in a restricted category, the VC Enterprise should apply with the provincial foreign trade and economic cooperation department for ap-proval. The regulations also require a VC Enterprises to apply for prior approval on their investments in the trading or service sectors which have been liberalized by the competent authorities.
These filing requirements seem to be bur-densome, and thus we would like to suggest that a report or notification to the authorities be deemed sufficient for an investment project with an amount or a shareholding percentage below certain threshold.
The regulations took effect on March 1, 2003. The Tentative Regulations Governing Foreign Investments in Establishment of VC Enterprises were abolished on the same date. Investors from Taiwan may follow the regulations in establishing VC Enterprises.