To facilitate the movement of funds from offshore venture capital (VC) funds into China, the Ministry of Foreign Trade and Economic Cooperation, the Ministry of Science and Technology and the State Administration of Industry and Commerce jointly promulgated the Provisional Regulations on Establishing Foreign-Invested Venture Capital Investment Enterprises, which came into effect September 1 2001.
The Regulations create the first legitimate mechanism for domestic Chinese investors to invest side by side with foreign investors and to have their funds managed by foreign fund managers by allowing Chinese investors to make investments in renminbi in foreign-invested VC funds.
Yet, in order for foreign investors to team up with Chinese partners, they must enter into one of the approved forms of joint venture funds with at least one qualified Chinese partner. The Chinese partner is subject to stringent quantitative and qualitative eligibility requirements. For example, the Chinese partner must meet at least the following requirements:
- venture capital investment must be its principal business;
- the accumulated capital under management in the prior three years of must be at least Rmb100 million ($12 million), or its net asset value at the end of the year prior to applying to form a fund must be at least Rmb100 million; and
- the minimum investment must be at least equal to $5 million.
The Regulations also impose significant quantitative and qualitative restrictions on foreign investors wishing to partner a Chinese investor in a foreign-invested VC fund. These restrictions are geared to limit venture capital activity in China to highly experienced, well-funded foreign fund managers and large, sophisticated foreign investors. A foreign partner must, among other things:
- carry on venture capital investment as its principal business;
- have accumulated funds under management of at least $100 million in the prior three years;
- make an investment of at least 3% of the fund's total committed capital; and
- invest a minimum of $20 million if it is the sole foreign investor or at least $10 million if it is one of the foreign investors in the VC fund.