A private investment (PI) fund is an investment fund established with funds raised from investors in a non-public manner. In a contract-based PI fund, the fund contract serves as the legal medium specifying the rights and obligations of the investors, fund manager and fund custodian. Such a fund has clear advantages over PI funds organized in the form of a limited partnership or company, in terms of the number of qualified investors, operational convenience, taxation, etc. With the increasing popularity of contract-based PI funds, fund investors, publicity and promotion, and investment in third parties have become the focus of regulatory authorities regarding the compliant operation of such funds.
Recognition of investors
The Interim Measures for the Oversight of Private Investment Funds specify that qualified investors of PI funds are entities or persons that have the appropriate risk identification and bearing capacities, that invest not less than RMB1 million (US$150,000) in a single PI fund, and satisfy the following criteria: (1) being an entity with net assets of not less than RMB10 million; or (2) being an individual with financial assets of not less than RMB3 million, or who has had an average annual income of not less than RMB500,000 during the most recent three years.
The Law on Securities Investment Funds limits the number of qualified investors in a single contract-based PI fund to 200. Additionally, the interim measures creatively establish the penetration principle, namely, where funds collected from multiple investors are directly or indirectly invested in a PI fund by a means not involving a legal person, such as by a partnership, by way of contract, etc., a penetrating verification of whether the ultimate investors are qualified investors is to be conducted, and they are also to be counted when counting the number of investors.
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