10 steps to set up a contractual private equity fund! (very detailed)

10 steps to set up a contractual private equity fund!

(very detailed) current，Domestic equity crowdfunding platforms are relatively more inclined to choose limited partnerships as investment entities，However, the rapid development of limited partnerships has also given rise to a lot of chaos.：The industrial and commercial departments in various places regulate the names of limited partnerships.、Different determinations of qualifications for general partners and conditions for entry and exit of limited partners，As a result, in practice, there are a large number of cases where two sets of partnership agreements, yin and yang, are used for industrial and commercial registration and for fixing the true expressions of the lead investors and co-investors.；And in some areas，For example, Shenyang，The industrial and commercial department has refused to accept limited partnership registration applications containing the words "investment" and other words.；Because local governments have different understandings and attitudes towards limited partnerships，The tax incentives granted to limited partnerships also vary widely.，With the "Notice on Cleaning up and Standardizing Preferential Policies such as Taxation" issued by the State Council in 2014 (Guofa [2014] No. 62), it has gradually exerted its efforts.，These local policies are in a very uncertain position。

Limited partnerships, which have been under a regulatory vacuum for a long time, have begun to face many restrictions.，And this restriction will become more and more stringent，But standardizing supervision cannot be achieved overnight.，It will take some time to digest these issues，this also means，Established at the present stage、Running a new limited partnership will face many uncertainties，In addition, the limited partnership is being established、manage、The costs of various aspects such as changes and cancellations are relatively high，Therefore, since the China Securities Regulatory Commission promulgated the "Interim Measures for the Supervision and Administration of Private Investment Funds" on August 21, 2014,，Contractual investment models have gradually become the focus of attention among industry insiders。

actually，The contractual investment model is not a new thing，The public funds adjusted under the "Securities Investment Fund Law" are established in accordance with the contract.，Trust plans account for most of the private equity investment funds、Fund company asset management plan、The same is true for brokerage asset management plans；Limited partnerships are only common among PE investment funds and nested investment funds.。

therefore，Contractual investment model is the normal form of various funds，Companies and partnerships are a special form of funds.。

From a legal perspective，The contractual investment model is established by leading investors、Based on the investment agreement signed by the investors and the equity crowdfunding platform，According to the investment agreement，Follow-up investors purchase private equity fund shares issued by the lead investor on the equity crowdfunding platform, etc.，After entrusting investment funds to the equity crowdfunding platform，loses the right to dispose and vote，Only enjoys the beneficial rights of the fund as a beneficiary；Lead investors serve as investment consultants for project funds，Playing the role of fund manager，The right to use contracted collective property for equity investment in one’s own name；Equity crowdfunding platform as custodian，Open independently accounted bank and securities accounts in the name of a single contract fund and conduct custody，And be independent from other fund property accounts。

Steps to set up a contractual private equity investment fund on an equity crowdfunding platform

Require

as follows:1、The Securities Investment Fund Industry Association's lead investor registration and fund filing systems are based on Article 5 of the "Interim Measures for the Supervision and Administration of Private Investment Funds"，There is no administrative approval required for the establishment of private equity fund management institutions and the issuance of private equity funds.，Allow all types of issuers to issue products in compliance with laws and regulations，Issuance of private equity funds to a cumulative number of qualified investors not exceeding the number prescribed by law。

However, private equity fund managers must comply with the relevant provisions of laws and regulations such as Chapter 2 of the "Private Investment Fund Manager Registration and Fund Filing Measures (Trial)" and the "Interim Measures for the Supervision and Administration of Private Equity Funds"，Complete the registration of the manager and the filing of the fund，That is, apply for registration with the Asset Management Association and become a member of the association.，And after the fund raising is completed，Go through the filing procedures with the Asset Management Association，In addition, relevant information about managers and their employees must be updated regularly，Submit the investment operations and annual financial reports of the private equity funds under management, etc.。

Before the lead investor on the equity crowdfunding platform issues a contractual private equity investment fund to follow-up investors，It is also necessary to go through the registration procedures for fund managers on the official website of the Asset Management Association；After fund raising is completed，The lead investor should register the contractual equity investment fund with the Asset Management Association。

1. The lead investor must meet the conditions of a qualified investor in accordance with the provisions of Article 12 of the "Interim Measures for the Supervision and Administration of Private Investment Funds"，Qualified investors are：Have corresponding risk identification capabilities and risk-taking capabilities，The amount invested in a single private equity fund is not less than 1 million yuan and meets the following relevant standards, and the individual net assets are not less than 10 million yuan.；Individuals whose financial assets are not less than 3 million yuan or whose average annual income in the past three years is not less than 500,000 yuan。

Article 14 of the "Measures for the Administration of Private Equity Crowdfunding Financing (Trial) (Draft for Comments)"：Investors in private equity crowdfunding refer to units or individuals that meet one of the following conditions and are qualified investors as stipulated in the "Interim Measures for the Supervision and Administration of Private Equity Investment Funds"；Units or individuals whose minimum investment amount in a single financing project is not less than RMB 1 million；social security fund、Enterprise annuities and other pension funds，Charitable funds and other social welfare funds，and investment plans established in accordance with the law and registered with the Securities Investment Fund Industry Association of China；Units with net assets of not less than RMB 10 million；Individuals whose financial assets are not less than RMB 3 million or whose average annual income in the past three years is not less than RMB 500,000，In addition to being unable to provide relevant property, the above-mentioned individuals、In addition to proof of income，It should also be able to identify、Judge and bear corresponding investment risks；Other investors specified by the Securities Industry Association。

The lead investor serves as the main investor of a single private equity investment fund，These conditions should be met。3、Regarding the qualified investment qualifications of co-investors, the supervision objects of the "Interim Measures for the Supervision and Administration of Private Investment Funds" are mainly traditional fund models with investment portfolios as their core content.，Therefore, when defining standards for qualified investors,，Failure to take into account the particularities of the “lead investment + follow-up investment” model in the field of equity crowdfunding，No differential treatment for qualified investors。

"Private Equity Crowdfunding Financing Management Measures (Trial) (Draft for Comments)" simply applies current practices on this issue，There is no distinction between the qualification standards for lead investors and follow-up investors.，This creates a real dilemma where standards are not only too high but also unreasonable，It is really a shortcoming in the technical aspects of supervision and legislation.。

but in practice，Classifying the eligibility criteria for lead investors and follow-up investors has become a common practice among equity crowdfunding platforms.，And this distinction is not limited to differences in financial status，It’s about the business philosophy of each platform、management mode、Target object and other parameters，Develop qualified investor standards that meet your own positioning。

This approach obviously has a greater potential for violation of regulations，A relatively realistic choice is，In setting the standards for qualified lead investors, we adhere to the provisions on qualified investors in the "Interim Measures for the Supervision and Administration of Private Equity Investment Funds" and the "Administrative Measures for Private Equity Crowdfunding Financing (Trial) (Draft for Comments)"，In setting the standards for qualified investors, we should appropriately incorporate the reasonable focus parameters of each platform.，In order to achieve the purpose of balancing practical effects and regulatory principles。

1. When the lead investor and co-investors sign an investment agreement, the legal relationship between the parties can be determined only through the provisions in the investment agreement. This is the biggest limitation of the contractual investment model.

Advantages

，therefore，The investment agreement signed by the lead investor and all follow-up investors has become a top priority.。The specific content of the investment agreement needs to refer to Article 93 of the Fund Law and the relevant provisions of the Trust Law。

Through such a contract，The rights and obligations between the lead investor and follow-up investors are clarified，Contractual funds were legally born，investment decision、Post-investment management and exit mechanisms are determined，The principles and methods of benefit distribution are reflected，Lead investor management

cost

It can also be agreed，It is worth mentioning here that，Contractual private equity funds usually use a contract-like method to pay the lead investor a fixed annual management fee.

cost

，If the lead investor’s annual management

cost

exceed this amount，Investors will not pay additional。

Such an important legal document，Only by treating every detail carefully，To ensure that the entire investment plan is implemented legally and compliantly。

1. Lead investor、Typically, investors sign a custody agreement with an equity crowdfunding platform.，The custody agreement exists in the form of custody clauses in the investment agreement，That is, the investment agreement is led by the investor、Signed jointly with investors and equity crowdfunding platforms，The scope of the platform’s rights and obligations as a custodian is directly listed in the investment agreement.；Of course, it can also be obtained with the consent of the investors in the individual contract-type investment plan.，The lead investor and the platform sign a separate custody agreement。

After signing the custody agreement，The platform should open independently accounted bank and securities accounts in the name of a single contract fund and conduct custody，And be independent from other fund property accounts。Although Article 21 of the "Interim Measures for the Supervision and Administration of Private Investment Funds"，"Except as otherwise stipulated in the fund contract，Private equity funds should be managed by fund custodians。

The fund contract stipulates that the private equity fund will not be held in custody，Institutional measures and dispute resolution mechanisms to ensure the safety of private equity fund property should be clearly stated in the fund contract.。

"That is, custody can be excluded through the investment agreement.，However, custody is an important way to distinguish the collective assets of a single investment plan from the assets of the lead investor.，If not hosted，Collective assets can easily be confused with the lead investor’s assets by regulators，thus denying the independence of collective property，And what this will mean for lead investors is，Whether investment risks can be effectively isolated between collective property and its own property，And whether the collective property and its investment income will be taxed as the property and income of the lead investor.，will be in a state of uncertainty。

From the perspective of maintaining capital security and protecting the interests of investors，The principal can be set in the contract structure、Institutional arrangement of three-party separation of trustee and custodian，As a trustee, the lead investor can issue instructions to use the funds，But it must comply with the provisions of the investment agreement，Otherwise, the custodian has the right to refuse any transfer of funds；on the contrary，If there is no special instruction from the lead investor，The custodian has no right to use the funds。

also，Supervisors can also be set up to supervise and restrict the management and use of funds.，This is another important institutional arrangement to ensure the safety of funds.。

1. Flexible exit mechanism，One of the most liquid contract-based investment models

Advantages

It is to have a flexible and convenient organizational form，Within the scope of legal compliance，Lead investors and co-investors are free to make various stipulations in the investment agreement，to meet the specific needs of both parties，In practice, this is often

Advantages

Used to solve the extremely important exit mechanism，That is, the investment agreement can have special clauses stipulating the investors’ flexible exit methods.，Because there is no mutually restrictive relationship between different investors in the same investment plan，Changes in some of the investors will not affect the validity of the investment plan.。

The original investors can transfer the beneficial rights at the purchase price through the equity crowdfunding platform.，to terminate the investment agreement，Withdraw funds；New investors can also invest on the platform by buying the beneficial shares from the original investors at the selling price.，Establish investment agreement relationship with lead investor。It is also more likely that shares of contractual funds will be allowed to be transferred through trading platforms in the future.，Will further improve the liquidity of fund shares。

1. About tax contract-based private equity investment funds are the same as other asset management businesses，There is currently no unified and clear tax policy on personal tax collection.，At present, we mainly refer to the "Notice on Tax Policies for Securities Investment Funds" (Finance and Taxation [2004] No. 78)、"Notice on Certain Preferential Policies for Corporate Income Tax" (Finance and Taxation [2008] No. 1)、"Ministry of Finance、State Administration of Taxation、Notice of the China Securities Regulatory Commission on Issues Concerning the Implementation of Differentiated Personal Income Tax Policies on Dividends and Bonuses of Listed Companies (Finance and Taxation [2012] No. 85) and other relevant laws and regulations.。

Contractual private equity investment fund as a collective property，No legal personality，Not considered a taxable entity，In practice, we always compare it with the asset management products issued on the market.，Including various trust products、Brokerage Asset Management Plan、Futures Asset Management Plan、Asset management plans of fund subsidiaries, etc.，Personal income tax is levied at a rate of 20%，due to trust company、Securities company、Futures Company、Fund subsidiaries, etc. will not withhold and pay personal income tax.，Instead, individual investors adopt the tax payment method of self-declaration.，Therefore, contractual private equity funds only need to distribute investment income，It is up to the beneficiary to declare and pay income tax on their own。

It is worth mentioning that，Tax blind spots for various asset management products，It is reported that the China Securities Regulatory Commission is also cooperating with the finance and taxation departments，It is hoped that this can promote the introduction of unified and clear tax policies.。

1. A brief summary of several dimensions of registration and filing，The contractual equity crowdfunding investment model actually involves four different types of registration and filing systems：Equity crowdfunding platforms need to register with the Securities Industry Association，Lead investors and funds need to register with the Asset Management Association，Investors, including lead investors and follow-up investors, need to register on the equity crowdfunding platform，also，It also involves the much-watched industrial and commercial registration filing.。

If investors’ registration on the equity crowdfunding platform solves the internal rights and obligations of investors,，Then the industrial and commercial registration filing solves the status issue of investors making external equity investments.。at present，Officials from the China Securities Regulatory Commission and the Asset Management Association have proposed in the public media，The China Securities Regulatory Commission is working hard to promote solutions for industrial and commercial registration of contractual funds as shareholders of unlisted companies.。

In practice, Suzhou、Industrial and commercial departments in Yancheng and other places learn from the practices of asset management plans and trust plans，Register the manager of the contractual fund as a shareholder of the unlisted company in which he invests，But it is the fund, not the manager, that actually enjoys shareholder rights.。This approach can certainly be replicated in the contractual equity crowdfunding investment model.，But we need to solve two problems：Will it bring potential tax risks to the lead investor?

That is, if the industrial and commercial department registers the lead investor as a shareholder of the project company，When a contractual investment plan receives dividends, interest or capital gains from the project company and exits，Will this part of the income be considered the income of the lead investor? Article 5 of the "Fund Law" has clearly stipulated that fund property is independent of the manager's own property.，The investment income obtained by the manager from the use of fund assets shall belong to the fund assets.，and cannot be attributed to the manager。

therefore，As long as it can be ensured that the collective assets are not confused with the assets of the lead investor,，That's not a problem。Second, does it constitute an equity holding relationship? Whether the relevant provisions on dormant shareholders and apparent shareholders apply，Who has the final shareholder rights?

1. Regarding equity holdings, the facts，The above method is not a typical equity holding relationship as defined by the Company Law.，Because the basic legal relationship of the contractual equity crowdfunding model is essentially a trust relationship，According to the definition of fiduciary relationship，The lead investor in the contractual equity crowdfunding model can completely raise funds in his or her own name，For the benefit of the beneficiary (investor) or for a specific purpose，Manage or dispose of entrusted property (contractual funds)。

therefore，The lead investor in his or her own name，Represent the contractual fund to hold the equity of the project company or the partnership share of the partnership，and exercise corresponding shareholder rights or partner rights in their own name on the premise of protecting the interests of investors.，Equity holdings based on contractual legal relationships，There are essential differences in the basic legal relationship。

Currently used by some industrial and commercial bureaus，A plan in which the contractual fund manager represents the contractual fund as a shareholder of a company or a partner of a partnership，does not violate trust law、company law、Legal rules determined by partnership law，Worth promoting in practice，And then copied to the field of equity crowdfunding。

If the name of the industrial and commercial registration can be expanded to：Contractual fund manager (held on behalf of contractual funds)，Intuitively, it is closer to the real legal status，This form has been adopted by industrial and commercial bureaus in some regions in the field of asset management planning and investment in private equity.，The asset management plan manager holds the company's equity on behalf of the asset management plan，The registered shareholder name is：Manager (held by the asset management plan)。

1. Regarding the upper limit on the number of investors, if I say this issue is the most headache for private equity investment practitioners，I guess no one will object。

But this is precisely the nature of the contractual investment model.

Advantages

location，According to the guidance of the Asset Management Association on the registration and filing of private equity funds，The maximum number of investors in a contractual private equity fund is 200，The maximum number of investors in a limited partnership is only 50，This gap in the scope of fundraising is already quite large.，But compared with the essential characteristics of small-amount decentralization of Internet finance,，But it’s insignificant。

How to legally and compliantly exceed the final limit on fundraising，Probably the secret that all Internet financial practitioners most hope to get.，May as well make some friendly reminders here：According to the provisions of Article 13 of the "Interim Measures for the Supervision and Administration of Private Investment Funds"，"As a partnership、Contract and other unincorporated forms，Directly or indirectly invest in private equity funds by pooling funds from a majority of investors，Private equity fund managers or private equity fund sales agencies should conduct thorough verification to see whether the final investor is a qualified investor.，And combined to calculate the number of investors。

but，Comply with this Article

1. 、
2. 、
3. Investors specified in this article invest in private equity funds，No more penetrating verification of whether the final investor is a qualified investor and a consolidated calculation of the number of investors。"The specific contents of the above three provisions are as follows：social security fund、Enterprise annuities and other pension funds，Charitable funds and other social welfare funds；An investment plan established in accordance with the law and registered with the Asset Management Association；Other investors specified by the China Securities Regulatory Commission。

therefore，Contractual private equity investment funds registered with the Asset Management Association，Invest in private equity funds，No more penetrating verification and combined head count calculations。

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