Are internet targeted entrusted investment products compliant?

On 18 March, the China Securities Regulatory Commission (CSRC) announced it would intensify the investigation and handling of unlawful engagement in the business of breaking up privately offered products into smaller units and transferring the same. It stated that “if discovered, the same will be stringently dealt with in accordance with the law”. The CSRC stated that “no institution or individual may offer, sell or transfer privately offered products or the right to benefit from privately offered products to unqualified investors, and a single privately offered product may not exceed the statutory upper limit”.

Against this background, certain media turned their attention to such targeted entrusted investment products as “Linghuobao” of LU.com. The author is of the opinion that although “the breaking up of the right to benefit from privately offered products” and “targeted entrusted investment” have, in terms of their objective effect, certain points in common – i.e., both permit retail investors to actually enjoy benefits from private equity funds or other privately offered financial products – certain differences in the legal relationships of both exist due to the differences in their transaction procedures.

Basic procedure

“Linghuobao” of LU.com is representative of targeted entrusted investment products. As described in the prospectus for such a product, the targeted entrusted investment product is usually offered through one or more special purpose vehicles (SPVs) and the product is then targeted at earned value managed, dedicated asset management plans, and investment returns are earned via the management of the subject matter of the targeted entrusted investment by the issuing institution.

The investment scope of the subject matter of targeted entrusted investment may include entrusted loans, trust plans (including rights to benefit from a trust), specific/dedicated asset management plans offered by fund companies and their subsidiaries, asset investment plans offered by securities companies, wealth management products of commercial banks, money market funds of fund companies, rights to benefit from notes, bank deposits, etc.

Wu Weiming is a senior partner at AllBright Law Offices in Shanghai