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China Private Equity: It’s Complicated
From http://bit.ly/1JOkZdC
Until a few months ago, just about everybody and their mother was interested (and some still are) in setting up companies in China to collect investment funds. The below is a fairly standard email we would write in response to foreign companies that wanted to do this via a China WFOE:
1. WFOEs are generally not permitted to collect funds in China as the funds holder for a crowd funding entity. Dealing with funds is a highly regulated business in China and no WFOE or JV (that is, no PRC company with any foreign ownership) would be permitted to operate in China. Note that a WFOE can only have foreign persons (companies and individuals) as shareholders.
2. You could however form a consulting WFOE in China that would allow you to provide advice to Chinese citizens on making investments outside of China. Note, however, that as is the case in the United States this type of investment advice is ultimately subject to various levels of government regulation. That is, if you are acting as a broker, then you will be regulated as a broker.
3. There is currently a lot of interest in China in investing outside of China in high tech projects and the PRC government officially encourages such strategic investing. As is always the case in China, however, it is important to look below the surface of these government pronouncements. In fact, very little Chinese outbound foreign investment (OFDI) has been made by private companies in the technology sector. Since 2005, the vast majority of investments have been made by SOEs in the resources sector. Private companies have for the most part been cut out of PRC OFDI, but that is slowly changing.
However, there is still a strong interest by PRC private investors. Some want access to leading edge technology. Others simply want to get their money out of China. There are in fact a number of PRC private equity funds that have been formed just to tap into this market. The situation for them has been as follows:
Though PRC individuals and private companies want to get their money out of China, the PRC government wants to keep the money in China. The PRC fears large capital outflows and still requires private investors secure to convert RMB to foreign currency for investments overseas. That approval has proved difficult to obtain.
To counter this, most private investors from China do not invest directly from China. They instead invest from their subsidiary entities located in tax havens such as Hong Kong, the Cayman Islands and BVI. By investing from these locations, they avoid both the PRC government approval process and they avoid tax on gains from their investment activities. This process then raises two issues in working to promote this type of investment: i) what is the actual source of the funds and ii) is the PRC is actively working to shut down this route of investment for private businesses.
4. So it is still difficult to work on a large scale with investment from Chinese individuals and private companies in foreign projects. This then leads back to the issue of forming a WFOE. Any investment you obtain from a private source in China is likely to be infected by the source/legality issues. This then makes for a very uncomfortable life for any person resident in China working on this kind of project. Most people who work in this area therefore set up in Hong Kong and leave the on the ground investment promotion to Chinese nationals affiliated with the various private equity and venture funds that are springing up all over China. The other option would be to set up a consulting WFOE that encourages Chinese to invest overseas via their offshore sources.
If you are still interested in pursuing something in China, I would encourage you to retain us to more thoroughly research your options. The above is based on past work we have done and there have no doubt been some changes on the margins that might give you greater opportunities.
The post China Private Equity: It’s Complicated appeared first on China Law Blog.
We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.
Source: http://www.chinalawblog.com/2015/09/china-private-equity-its-complicated.html
