China's securities regulator has offered exemptions to venture capital and private equity firms from new measures restricting how quickly shareholders can offload their stakes in newly listed companies.
On May 26, the regulator unveiled new rules limiting the ability of major shareholders to sell their stakes in newly listed companies for a quick profit, which often occurs to the detriment of small individual shareholders in China.
Most venture and private equity funds, however, will be in a position to apply for exemptions from the new rules, the China Securities Regulatory Commission disclosed on its website Friday evening.
"The development of venture capital funds has broadened the financial channels for small and medium enterprises, assisted the industrial upgrade and economic structural shift, and encouraged private investment in the real economy, and is therefore an important force for pushing innovation and entrepreneurship," said the securities regulator. "Therefore, (we) are providing necessary support for venture funds that are focused on long-term investments and value creation."
The clarification provided much-needed relief to venture and private equity investors in China. Being subject to the new rules would have significantly reduced their ability to exit their interests in portfolio companies even after they are publicly listed, which usually require years of application and wait time already.
Specifically, qualified venture funds that do not own control of a company will adhere to a 12-month lock-up period, instead of a 36-month lock-up. Likewise, Qualified funds that own 51% or more of companies are also subject to a 12-month lock-up.
To qualify for the second exemption, the venture funds need to have initially invested in the company when it was less than 60-month old, had fewer than 500 employees, with annual sales below RMB200 million and total assets of less than RMB200 million.
Funds are also required to have invested in the company at least 36 months before they apply for the exemption. Lastly, funds must need to be registered with the Asset Management Association of China and be in good standing.
Applications for exemption from certain share sale restrictions must be reviewed and approved by the CSRC, according to the announcement.
The May 27th measures expanded entities subject to these stricter rules to include investors who acquire stakes during follow-on transactions after the initial public offering. It also detailed how quickly major shareholders can offload their interests to avoid large scale share dumping, as well as strengthened disclosure requirements.