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China

New Regulations on the Administration of Foreign-invested Venture Investment Enterprises were promulgated in China on January 30 2003. The new regulations were put forward jointly by the Ministry of Foreign Trade and Economic Cooperation, Ministry of Science and Technology, State Administration for Industry and Commerce, State Administration of Taxation and State Administration of Foreign Exchange .

The Regulations became effective on March 1 2003 and Interim Regulations on the Establishment of Foreign-invested Venture Investment Enterprises promulgated in 2001 were repealed on the same day.

According to the new Regulations, foreign-invested venture investment enterprises (FIVIEs) are foreign-invested enterprises established in China by foreign investors alone or with companies, enterprises or other economic organizations registered under Chinese law whose business activities are venture investment. FIVIEs can be either in the form of non-legal persons or in the form of corporations. Investors in a FIVIE with non-legal person status are jointly and severally liable for the debts incurred by the FIVIE. The investors in a FIVIE with non-legal person status must also provide, in the FIVIE contract, that the obligatory investor will bear joint and several liability for the debts of the FIVIE, and the other investors will bear liability to the extent of the capital contributions subscribed by them.

The agreed amount of contribution and the limit of management capital have been reduced under the Regulations. The bottom line of contribution of non-legal person FIVIEs is $10 million; for corporation FIVIEs, the bottom line is $5 million. Each investor (except the obligatory investors), should invest no less than $1 million in a FIVIE.

A FIVIE must have at least one obligatory investor. The obligatory investor can be a foreign investor or a Chinese investor. An obligatory investor must have managed a total of no less than $100 million for three years before it applies to establish a FIVIE in China and $50 million of the $100 million must have been used as venture investment. If the obligatory investor is a Chinese company, it must be a company which has managed a total of no less than Rmb100 million ($12 million) for three years before it applies to establish FIVIEs and at least Rmb50 million out of the $100 million must have been used as venture investment.

A FIVIE can engage in the following business:

  • purchasing equity with all its own funds, including establishing new enterprises, investing in established enterprises, purchasing shares of established enterprises and other methods permitted by law;
  • providing venture investment consulting services;
  • providing management consulting services to the enterprises in which it has invested;
  • other business approved by the authority.

A FIVIE must select an appropriate exit mechanism when selling or using other methods to dispose of shares of enterprises in which it has invested. The exit mechanism includes:

  • assigning all or part of the equity it holds in the enterprises invested by it to another investors;
  • entering into an equity buyback agreement under which the enterprises in which it has invested buys back the equity held in it;
  • when the enterprises in which it has invested satisfy the conditions for listing, it may apply to list its shares on a domestic or overseas stock market, in this event, the FIVIE can lawfully transfer the shares it holds through open market.

A FIVIE can be managed by itself or by another FIVIE or a venture investment management enterprise (VIME). The VIME can be a domestic Chinese VIME, a foreign-invested VIME or a foreign VIME.

A VIME's registered capital or total investment must be not less than Rmb1 million or equal foreign exchange. A VIME can be in the form of a corporation or in the form of a partnership. A VIME can be entrusted to manage more than one FIVIE.

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