abstract
Recently, my team provided legal services for the filing of contractual fund products for a private equity investment fund manager, including fund product architecture design, preparation of fund contracts and other filing documents required by the fund industry association, and filling in system information. Looking back at the past, the case has come to an end. The author attempts to sort out and summarize the legal points and practical considerations for the filing of contractual private equity fund products. The article is divided into two parts, the first one being "A Few Things You Must Know About Contractual Funds", which focuses on grasping the characteristics and operational models of contractual private equity funds as a whole. Firstly, the author starts with several confusing concepts to clarify the essence and internal connections of high-frequency vocabulary that often troubles fund practitioners, such as the distinction between closed and open operations; Secondly, the author has outlined a simple and clear flowchart to help readers understand the overview of fund establishment, issuance, and compliance operations. This article is for you to interpret one by one.
Part 1
Clarification of Several Easily Confused Concepts
one
Fund size, fundraising scale, total fund shares, and fund shares
The total size of a fund refers to the total size or planned fundraising amount of the fund subscribed/subscribed by each investor as clearly stipulated in the fund company's articles of association, partnership agreement, or fund contract.
The scale of fundraising refers to the amount of funds raised by a fund to investors in a one-time or installment manner. Simply put, it refers to the amount of funds that investors transfer from their bank accounts to the fundraising account and confirm through follow-up visits after a cooling off period. If the fund is raised in one go, the total size of the fund is equal to the fundraising size; If the fund is raised in installments, subsequent fundraising may result in a change in the total size of the original fund (fundraising). The first round fundraising scale plus subsequent fundraising scale equals the total size of the fund after fundraising.
The total amount of fund shares, for contractual funds, there is no distinction between subscribed and paid up capital, and the total amount of fund shares is equal to the fundraising scale; For partnership/corporate funds, the total amount of fund shares refers to the total size of the subscribed funds.
Fund shares refer to the fund shares confirmed by the fund share registration institution [1]. For funds raised in installments, the fund share is equal to the cumulative fundraising scale.
For example, in the fund contract of Contractual A Private Equity Fund, it is stipulated that the total size of the fund subscribed by each investor is RMB 600 million (or the total planned fundraising amount is RMB 600 million). The fund is raised in two phases, with investors raising RMB 200 million in the first round of fundraising. As of the delivery date of the first round of fundraising, the total scale of the fund is RMB 600 million, the fundraising scale (first round) is RMB 200 million, and the total amount of fund shares is RMB 200 million. It is worth noting that the fund share confirmed by the fund share registration institution is RMB 200 million, and the "fund share" reported on the asset management business comprehensive reporting platform of the China Securities Investment Fund Industry Association (hereinafter referred to as the "Ambers system") is also RMB 200 million, not RMB 600 million.
Taking a closed-end contractual fund as an example, the author uses a chart to illustrate the relationship between fund size, fundraising scale, and installment fundraising:
two
Closed and open operations
The characteristic of closed end operation is that the total amount of fund units is fixed and cannot be redeemed, while the total amount of fund units in open end operation is not fixed and can be subscribed and redeemed [2]. If a fixed open period is not set, but a "temporary open day" is set according to the situation, it should also belong to closed operation [3].
In short, the comparison between closed-end operation and open-end operation of contractual funds is as follows:
Furthermore, it should be noted that the subscription behavior of contracted fund unit holders on temporary open days will lead to a change in fund size. Does this contradict the principle of "fixed total fund unit amount" in closed end operations? The author's understanding of this issue is as follows: (1) According to the definition of closed end operation in the Securities Investment Fund Law, there is no prohibition on subscription, only emphasis on non redemption. The behavior of investors applying for purchases on temporary open days does not affect closed operations. (2) At present, there is an urgent need for subsequent fundraising in reality, and the fund industry association cannot ignore it. The establishment of the mechanism of "no redemption within the temporary open day can be applied for" has achieved some balance between legal provisions and practical needs, in order to meet the flexible arrangements for subsequent fundraising of contractual funds.
three
Establishment date and expiration date
Generally speaking, the date on which the fund manager, fund unit holder (investor), and custodian sign the fund contract can be regarded as the date of fund establishment.
From the perspective of the custodian institution, for the sake of property safety, the custodian may require that one of the prerequisites for the establishment of the fund be stipulated in the fund contract, which is that the raised funds have fully reached the custody account. For example, in a contractual fund contract, it is stipulated that "the conditions for the establishment of the fund are:... the fund manager shall transfer all the raised funds into the custody account and issue a" Notice of Initial Establishment "and relevant operational information to the fund custodian, and the private fund custodian shall verify that the raised funds recorded in the" Notice of Initial Establishment "sent by the private fund manager have fully arrived in the custody account...".
The Ambers system's annotation for "fund establishment date" refers to the date of establishment of a private equity fund, which can be filled in as the date when each investor completes the first round of delivery (paid in capital) after signing the partnership agreement or company articles of association.
At this point, there are actually five time points: the date of signing the fund contract, the date when the raised funds are transferred into the raising account, the first delivery date, the successful filing of the fund product, and the date when the raised funds are transferred from the raising account to the custody account, all of which may be understood as the date of fund establishment. In fact, this is due to different understandings of the establishment date of the fund from different perspectives. When filling in the Ambers system, simply follow the prompts provided by the Fund Industry Association and do not overly emphasize the complete consistency between the fund contract and the information filled in the Ambers system.
The expiration date of a fund refers to the date agreed upon with investors in the fund contract to terminate the operation of the fund.
four
Effectiveness and Termination of Fund Contracts
Unless otherwise specified, fund contracts generally come into effect immediately from the date of establishment. Of course, the fund contract can also stipulate that investors/fundraising institutions have the right to unilaterally terminate the fund contract: even if the investment funds have been transferred to the fundraising account, investors still have the right to terminate the fund contract before the fundraising institution's follow-up confirmation is successful. When the aforementioned situation occurs, the fundraising institution shall promptly refund the subscription funds of the investors in accordance with the contract agreement. If the follow-up confirmation is not successful within the agreed time of the fundraising institution, the fundraising institution has the right to terminate the fund contract and promptly refund the investor's subscription amount as agreed in the contract. If the fundraising institution's follow-up visit is successful, the effectiveness of the fund contract will not change (which can be understood as the contract continuing to be valid).
Part 2
Issuance establishment and compliance operation
one
Issuance and establishment
To understand the essence of private fund issuance and establishment, it is necessary to first clarify the sequence of the four important time points related to private fund (fund manager registration, fund raising, fund product filing, and project investment). Before explaining this issue, I would like to take a picture and feel it together:
Registration before fundraising: Fund managers can only engage in fundraising activities for private equity funds after registering as private equity fund managers with the Fund Industry Association.
Raising before filing: The fund manager shall file the fund product through the Ambers system within 20 working days after the fundraising is completed. There is currently no clear regulation at the regulatory level regarding the understanding of "fundraising completed", especially in the scenario of phased fundraising, whether it is "completion of the first round of fundraising" or "completion of all cumulative fundraising scales" that meets the definition of fundraising completed. Based on practical experience, the author believes that in the filing of fund products raised in installments, product filing can be carried out after the completion of the first round of fundraising. The completion of the first round of fundraising refers to the amount of funds that investors transfer from their bank accounts to the fundraising account and confirm their success through a follow-up visit after a cooling off period.
Hong Lei, President of the Fund Industry Association, stated at the 2019 Global Private Equity Summit that "prepare first and raise later. Some products can expand their fundraising targets and scale at will after completion of registration, and even use registration credit to endorse fundraising activities. Once this behavior breaks through the bottom line of qualified investors, it can easily become illegal fundraising." Prepare first and raise later refers to raising a portion of funds to complete product registration, Subsequently, raising funds led to an increase in the size of the funds subscribed by investors.
Filing before investing: Private equity funds without registration and filing will affect the relevant investment operations. In practical operations, most custodial institutions require fund products to be registered before investing. Hong Lei, President of the Fund Industry Association, stated at the 2015 China Asset Management Market report that private equity institutions need to register and their products need to be filed, otherwise there is suspicion of illegal fundraising.
two
Compliance Operations
The successful completion of fund registration and filing by fund managers does not necessarily mean that they have finally met the requirements of regulatory authorities and can be completed once and for all. In fact, the compliant operation of fund products is a continuous and massive project that requires managers to continuously invest energy and financial resources. The fund operation process includes four parts: fundraising, investment, management, and retirement, each of which is an important criterion for measuring the success of investment and is indispensable. The author uses a diagram to illustrate the process of fund compliance operation:
Raising: The raising behavior includes eight steps, which the author will introduce in detail in the next article.
Investment: The project investment includes preliminary review of the project, signing of investment intent letters and confidentiality agreements, due diligence (including legal due diligence, financial due diligence, and business due diligence), signing of formal transaction documents, payment of investment funds, and industrial and commercial changes (for contractual funds, the manager represents the fund to make project company shareholders).
Management: Post investment management is a crucial aspect of the entire operation of private equity funds, including financial management, human resources, operational management, and compliance support. From the perspective of private equity funds, information disclosure during fund operation is also extremely important and closely related to the compliance operation of private equity funds. The obligation to disclose information to the fund industry association includes:
Exit: The exit methods of private equity funds generally include listing exit, merger exit, repurchase exit, and liquidation exit. Fund liquidation includes: deciding to terminate the fund, determining a liquidation group, accounting for fund assets, processing and distributing fund assets, preparing a liquidation report, applying to the fund industry association for fund liquidation filing, and cancellation by industry and commerce (omitted for contractual funds).
In the previous article, the author introduced private equity funds as a whole. In the next article, the author will explain the details of compliance points one by one. Interested friends, we will see you next week.
annotation
[1] According to Article 67 (2) of the Securities Investment Fund Law: "When an investor delivers the subscription amount, the subscription is established; when the fund unit registration institution confirms the fund unit, the subscription becomes effective
[2] Article 45 of the Securities Investment Fund Law: "A fund that adopts a closed end operation method (hereinafter referred to as a closed end fund) refers to a fund in which the total amount of fund units remains fixed and unchanged during the term of the fund contract, and fund unit holders are not allowed to apply for redemption; a fund that adopts an open end operation method (hereinafter referred to as an open end fund) A fund refers to a fund where the total amount of fund units is not fixed and the fund units can be subscribed or redeemed at the time and place specified in the fund contract
[3] When filling in the contract fund product registration fund information in the Ambers system, the system notes: "For funds that are not open for subscription or redemption during their existence period, they should choose 'closed operation' (for funds that do not set a fixed opening period but set a 'temporary opening day' according to the situation, they should also choose 'closed operation')
[4] For example, there is an agreement in the contractual fund contract that "a temporary open day is set to accept investors' subscriptions." "Investors can apply for fund units at any time on the temporary open day set by the private fund manager." "During the temporary open day, this fund only accepts fund subscription applications and does not accept other applications
[5] The Ambers system notes that for funds with extended periods set in fund contracts, partnership agreements, or company articles of association, only the regular expiration date is filled in, and the extended period is not included.
[6] Article 9, Paragraph 1 of the "Registration Instructions for Private Fund Managers": "If the institution applying for registration as a private fund manager has the following circumstances, the association will not handle registration: the applicant institution violates the" Securities Investment Fund Law of the People's Republic of China "and the" Interim Measures for the Supervision and Administration of Private Investment Funds " Regarding regulations related to fund raising, issuing private equity funds in violation of regulations before applying for registration, and engaging in public promotion and fundraising from non qualified investors
The Measures for the Administration of Private Equity Fund Raising Activities "states that institutions registered as private equity fund managers with the China Securities Investment Fund Industry Association (hereinafter referred to as the China Fund Industry Association) may independently raise their established private equity funds... No other institutions or individuals are allowed to engage in private equity fund raising activities
[7] Article 94 of the Securities Investment Fund Law: "After the non-public offering of a fund is completed, the fund manager shall file a record with the fund industry association
Article 11 of the Measures for Registration and Filing of Private Equity Fund Managers (Trial): "Private equity fund managers shall, within 20 working days after the completion of private equity fund raising, register through the private equity fund registration and filing system, and indicate the fund category based on the main investment direction of the private equity fund, truthfully fill in the fund name, capital scale, investor, and fund contract Basic information such as the articles of association or partnership agreement of the fund company, hereinafter collectively referred to as the fund contract
[8] Question 21 of the "Summary of Key Points for the Registration and Filing of Private Equity Funds": "Does the failure of private equity funds to register and record affect the relevant investment operations? According to the Securities Investment Fund Law and the China Securities Regulatory Commission's" Interim Measures for the Supervision and Administration of Private Equity Investment Funds " Private fund managers should register with the fund industry association, and private funds should register with the fund industry association. Private equity funds without registration and filing will affect their participation in investment business within the China Securities Regulatory Commission system
[9] Article 20 of the Measures for the Registration and Filing of Private Equity Fund Managers (Trial): "Private equity fund managers shall update the relevant information of non securities private equity funds such as private equity investment funds managed within 10 working days from the end of each quarter, including subscribed scale, paid in scale, number of investors, and main investment directions
[10] Article 21 of the Measures for Registration and Filing of Private Equity Fund Managers (Trial): "Private equity fund managers shall update the basic information of private equity fund managers, shareholders or partners, senior managers and other practitioners, as well as the managed private equity funds, within 20 working days from the end of each year
[11] Article 21 of the Measures for the Registration and Filing of Private Equity Fund Managers (Trial): "Private equity fund managers shall fill in and submit the annual financial report audited by an accounting firm through the private equity fund registration and filing system before the end of April of each year
[12] Article 22 of the "Measures for the Registration and Filing of Private Equity Fund Managers" (Trial): "Private equity fund managers shall report to the fund industry association within 10 working days if they:
（1） Changes in the name and senior management personnel of private fund managers;
（2） There is a change in the controlling shareholder, actual controller, or executive partner of the private fund manager;
（3） Separation or merger of private fund managers;
（4） The private fund manager or senior management personnel have engaged in significant illegal and irregular activities;
（5） Dissolved in accordance with the law, revoked in accordance with the law, or declared bankrupt in accordance with the law;
（6） Other significant matters that may harm the interests of investors
[13] Article 23 of the Measures for Registration and Filing of Private Equity Fund Managers (Trial): "During the operation of private equity funds, if the following major events occur, the private equity fund manager shall report to the fund industry association within 5 working days:
（1） Significant changes occur to the fund contract;
（2） The number of investors exceeds the requirements of laws and regulations;
（3） The fund undergoes liquidation or liquidation;
（4） Changes in private fund managers and fund custodians;
（5） Other events that have a significant impact on the continued operation of the fund, investor interests, and net asset value