On 23 November 2011, the National Development and Reform Commission (NDRC) issued a Notice on Promoting Regular Development of Equity Investment Enterprises (Fa Gui Ban Cai Jin  No.2864) (2864 Notice). The 2864 Notice expands existing regulations covering private equity activities in certain pilot areas to a nationwide level. The pilot scheme regulations, set out in the Notice on Prompting Regular Development and Filing of Equity Investment Enterprises in Pilot Areas (Fa Gui Ban Cai Jin  No.253) (253 Notice) issued by the NDRC on 31 January 2011, covered Beijing, Shanghai, Tianjin, Jiangsu province, Zhejiang province and Hubei province.
Based on the 253 Notice, the 2864 Notice standardises the establishment and operation of equity investment enterprises (EIEs) in China. This article highlights some important aspects in five major areas: establishment, fund raising and operation of EIEs; risk management; responsibilities of management companies; information disclosure; and the nationwide filing system.
1. Establishment, capital raising and operation of EIEs
An EIE may be established in the form of a limited liability company, a joint-stock limited company or a partnership under the PRC Company Law or PRC Partnership Law.
An EIE may only raise capital on a private placement basis. Advertisements to and solicitations from the general public are prohibited. The 2864 Notice clarifies the permitted number of investors for the EIE: (i) less than 50 investors for a limited liability company, (ii) 2 – 200 investors for a joint stock limited company as set out in the PRC Company Law, and (iii) 2 – 50 investors for a limited partnership as set out in the PRC Partnership Law. Where an investor is a collective investment trust, partnership or any other non-legal entity, the number of ultimate investors is included in the count. However, a fund of funds investor is considered as one investor – this is the first time a Chinese private equity regulation has expressly included the fund of funds vehicle under its regulating scheme.
An EIE may either be self-managed or managed by another EIE or by an equity investment management company.
The EIE’s equity investments are restricted to stock of non-publicly-traded companies. Any unused funds should either be deposited in a bank or be used to purchase fixed-income investment products.
2. Risk management
An EIE should properly assess its risks and put in place a risk management mechanism. An EIE is prohibited from providing a guarantee to any enterprises other than those in which it has invested. The 2864 Notice requires the EIE’s assets to be held by independent custodians unless otherwise agreed by all investors.
3. Responsibilities of management companies
Where the management functions have been delegated, that entity should prepare and implement the investment plan, and disclose to the EIE any relevant information regarding its management.
4. Information disclosure
An EIE is required to file its annual business reports and audited financial statements with the authority within four months after the end of the accounting year. An EIE is also required to report to the authority within 10 working days of the occurrence of a major corporate event which includes: constitutional amendments; changes to the capital or external financing of the EIE or the management company; merger or consolidation involving the EIE; changes to the management company or custodian; dissolution, liquidation or receivership of the EIE.
5. Nationwide filing system
The NDRC has established a new nationwide filing system. Within one month after the registration with the Administration for Industry and Commerce, an EIE with capital of more than RMB 500 million must submit an application for filing with the NDRC, and an EIE with capital less than RMB 500 million must submit an application for filing with an authority as designated by the provincial government, unless: