BEIJING - China issued its first national regulations on Thursday for equity investment in unlisted companies in a move to crack down on illegal fund-raising in the domestic venture capital (VC) and private equity (PE) sectors.

The five-part regulation "signals equity investment in China has started to be institutionalized", according to a statement by the National Development and Reform Commission (NDRC) on its website.

The regulation states that investors should be fully informed of the risks in equity investment and have the financial ability to bear the risks.

The regulation will also strictly enforce existing limits on the number of investors in such projects.

According to NDRC research, 1,059 limited partnership funds illegally raised funds this year, the 21st Century Business Herald reported last month.

According to the newspaper, government authorities in Tianjin said in August that a fraudulent equity investment firm called Huolimu Equity Investment Fund had raised about 1.6 billion yuan ($251.6 million) from more than 5,000 people around China.

The money could not be traced, the newspaper said.

Previously, according to other domestic media reports, two other equity investment firms - Tiankai Xinsheng Equity Investment Fund in Tianjin and Well Well Group in Shanghai - also defrauded investors.

Under Chinese law, anyone who establishes a VC or PE firm or fund must follow certain requirements.

A joint stock firm or fund can have up to 200 investors, while limited funds or partnerships are limited to 50 investors.

Jin Haitao, president of the Shenzhen Capital Group, a Chinese VC firm, said the government should regulate the market because illegal fund-raising problems would give a bad reputation to the entire equity investment sector.

"If VC and PE companies are registered and regulated, the market can develop in a more healthy way because we have more complete and accurate information and analysis," said Jin.

A founding partner of VC firm IDG Capital, Xiong Xiaoge, said that the new regulations are a positive step, and he hoped that equity investment companies could also get government support in raising funds.

"The efficiency of fund raising in China is not good, and we hope the country can set up a particular agency to help small and medium-sized enterprises (in the equity investment sector) obtain finance.

"We also look forward to seeing some particular government funds that participate in other funds."

China Daily

(China Daily 12/09/2011 page14)