Drafted Venture Capital regulations for Shanghai municipality likely to always remain a draft
A recent enquiry made regarding the drafted venture capital regulations for the Shanghai municipality has revealed that the draft is likely to always remain a draft because the Shanghai authorities wish to enact the regulations, which will:
- vary somewhat from certain centrally promulgated laws; and would
- pin down the municipal authorities or force them prematurely to take a position on the handling of venture capital matters where greater benefit to the city would follow from retaining the ability to respond more flexibly to investor requests
In general it is the intention of the Shanghai authorities to ensure that whatever preferential treatments investors are offered in other cities, are also offered to investors in Shanghai.
The State Development and Planning Commission, however, have stated that they soon will promulgate new legislation on venture capital.
They already have been through three drafts of "The Temporary Measures on the Administration of Venture Capital Companies" (hereinafter the "Draft Measures").
The following nine principles are provided in the Draft Measures:
1 All of the assets of venture capital companies can be used for investment in other companies
2 Venture capital companies can invest in other companies through such instruments as "ordinary shares with special voting power" and "transferable preferential shares"
3 Substantial solutions will be provided to assist private equity players to participate in venture capital companies, by spelling out the responsibilities and rights of the principal sponsor of a venture capital company
4 The registered capital of an ordinary company needs to be contributed and verified but that of a venture capital company can be promissory. This innovation will solve the problem of leaving funds unused for a long time.
5 The management of a venture capital company can be entrusted to others;
6 It will be confirmed that the management personnel and the consultancy organization of a venture capital company can be specially compensated for their achievements (presumably with stock options or something similar);
7 Venture capital companies can have an indefinite time duration;
8 Government will use taxation devices to guide investment into the field of venture capital investment.
9 The incorporation of venture capital companies will be subject to the approval of usual government authority.
The Draft Measures are in seven chapters and have 31 clauses. The seven chapters are:
Chapter 1: General Principles;
Chapter 2: The Incorporation of Venture Capital Companies;
Chapter 3: The Management and Consultancy Organization of Venture Capital Companies;
Chapter 4: The Investment Operation of Venture Capital Companies;
Chapter 5: Encouragement and Support Given to Venture Capital Companies; and
Chapter 6: The Supervision Over Venture Capital Companies;
Chapter 7: Supplementary Articles.
For further information on this please contact Richard Cao, who is seconded to the Shanghai office of CMS French member firm, CMS Bureau Francis Lefebvre, on richard.cao@shanghai.cmslegal.com.
