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Long-awaited Solution to Facilitate Capital Market Exits for Onshore Private Equity Funds Ready for Public Comment

October 15, 2009

 

Chinese onshore private equity funds have historically faced procedural barriers in executing public market exits into the Chinese capital markets (the A-share market), due to the lack of a specific legal basis to open brokerage accounts with the applicable clearing house (the China Securities Depository and the Clearing Corporation Limited (“Clearing House”)). A brokerage account is required in order to hold and transact in the security listed on the A-share or other public market. Previously, only “corporate” enterprise legal persons and natural persons could open such accounts. However, most private equity funds are structured as partnership enterprises or non-legal person entities (such as the foreign-invested venture capital enterprises, or “FIVCIEs”). This led to ongoing concern that such PE funds would need to either obtain ad hoc approval to establish a special purpose brokerage account or unwind their investment holding structures in order to execute the public offering of their portfolio companies.

The China Securities Regulatory Commission (“CSRC”) has now taken formal steps to resolve this problem. On October 13, 2009, the CSRC released an exposure draft for comment entitled the Amendment of the Administrative Measures on Securities Registration and Settlement (the “Draf”). The Draft expands the scope of entities entitled to open a brokerage account to include partnership enterprises and “other investors.” A separate explanation from the CSRC clarifies the meaning of “other investors” to include non-legal persons such as “FIVCIEs”. A supplemental announcement also names QFIIs (which already enjoy formal brokerage account abilities), foreign strategic investors, foreign individuals, and other entities for inclusion in the new measures.

While the Draft and the supplemental explanation are not yet legally effective, the new policy is quite clear and should pave the way for smoother exits by onshore funds in the near future. Presumably, the Clearing House will update its working rules on brokerage accounts after the Draft takes effect.

The deadline for comments to the Draft is October 28, 2009. O’Melveny & Myers will be submitting comments to the CSRC regarding the Draft (and is accepting suggestions from interested parties for consolidated comments prior to October 23, 2009). Please contact the authors of this alert to share your comments or to discuss further the implications of the Draft.