天津富通鑫茂科技股份有限公司
Tianjin Futong Xinmao Science and Technology Co., Ltd.
Stock code | 000836
Cases of “Protecting Investors • Know Rules, Identify Risks”(15)

Part IV: Market Subjects Violating Regulations

Case 3: “Dangerous Game” for Non-Qualified Investors

Source: China Securities Regulatory Commission www.csrc.gov.cn


A private equity investment fund (the “PE Funds”) is an investment fund established within the People’s Republic of China, by private offering and fund-raising targeting investors. The PE funds are in contractual, corporate and partnership types.

In recent years, China's PE fund industry has flourished and become an important force in the development of multi-level capital markets. However, risk events such as illegal fund-raising, cashing crises, illegal propaganda, and violation of investor suitability system have emerged. Among them, some broke the bottom line of qualified investors in the name of financial innovation. As the CSRC's Interim Measures for the Supervision and Administration of Private Equity Investment Funds (hereinafter referred to as the “Private Equity Measures”) clearly stipulates the standards for being qualified investors of the PE fund, that is, they should have the corresponding risk tolerance and risk-taking ability, and the amount invested in a single PE fund should not be less than 1 million. In order to circumvent regulatory requirements, some companies attempted to break the bottom line of qualified investors in a variety of means.

Take an investor Wang as an example. In 2014, a certain fund company sold a limited partnership fund product to Wang. Wang paid RMB300,000 only, which was less than RMB1 million required for a single PE fund. The fund company’s act of raising funds from non-qualified investors violates the provision that “the PE fund should be raised from qualified investors” in Article 11 of the “Private Equity Measures”. The CSRC decided to give the company a warning and imposed a maximum fine of RMB30,000.

There is a typical case of evading the standards for qualified investors through the concept of “right to yields splitting and transfer” of private equity products. “XX Bao” was the internet financial platform that provided so-called “return of income rights” services through its website and APP. Specifically, the operator company C of “XX Bao”, through its wholly-owned the company D, as a qualified investor, purchased the relevant private equity products first; the right to yields was split by the company D and then transfer it to registered users via “XX Bao”, registered users can also transfer the right to other registered users through “XX Bao”. The minimum investment amounts set by “XX Bao” include RMB1,000 (fixed income category) and RMB10,000 (equity category). In addition, according to the “Revenue Transfer Agreement” signed by the company D and the investors, the risks and benefits of private equity products should be borne by the transferee, i.e., the investors. Afterwards, the relevant CSRC found that the company C violated the “Private Equity Measures” and constituted an illegal private equity acts such as raising funds from non-qualified investors, illegal transfer of the PE fund, and the number of private equity investors exceeding the statutory ceiling. The CSRC took administrative supervision measures towards the company C and its legal representative and relevant management personnel. The investors involved suffered different degrees of losses, and the case triggered complaints from many investors.

PE fund products are highly risk and require investors with certain risk identification capabilities and affordability to purchase. In the above case, the investors assumed the risk surpassing their affordability. For example, Wang only invested RMB300,000 to purchase PE fund products with an investment threshold of RMB1 million. In the second case, after the products was split and transferred, the risks were all transferred to investors. Such behaviors have lowered the threshold of qualified investors, making investors with weak risk identification ability and risk-bearing ability bear the risks that they should not have borne.

Based on the above cases, investors are reminded to pay attention to the following points:

Firstly, investorsmust do what investorscan. PE fund investment is characterized by high risk, and requires users to have high ability of risk identification and tolerance. The “Private Equity Measures” also clarify the requirements for a qualified PE fund investor: in addition to a single PE fund investment fund should not be less than RMB100 million, net unit asset should not be less than RMB10 million, personal financial assets not less than RMB3 million or the average annual personal income in the last three years less than RMB500,000. Investors should be realistic and act according to their capabilities, follow PE fund investor eligibility criteria, and select proper products under the premise of meeting these standards.

Second, investorsmust know all details. Only PE fund managers who are legally registered with fund industry associations can raise funds from qualified investors. Investors are advised to log in the fund industry association website (www.amac.org.cn) to check whether the institution are registered before purchasing its PE fund products, and avoid purchasing through illegal channels. Meanwhile, investorsmay learn about the past performance of the PE fund managers, market reputation and integrity compliance.

Thirdly, investorsmust read the contract carefully. A fund contract is an important instrument that stipulates the rights and obligations of investors and PE fund managers. Investors are advised to pay attention to whether the contract complies with the “Guidelines for Contracts for PE fund Investment Funds” issued by the Fund Industry Association, whether the rights and obligations stipulated in the contract are reasonable, whether the contract is complete, and whether there are any abnormalities such as missing pages, and read the terms carefully and request the fund manager to explain the concept that they don’t understand and the expressions that are vague, avoiding be fooled or blinded by exaggerated or false propaganda. For contracts made in multiple copies, investors should check whether the content in all contracts are completely consistent. In addition, investors must be especially vigilant about the collection of illegal funds like the company C in Case 2, which was in the guise of "financial innovation". Investors should carefully read the product introductions and know whose product to be purchased and with whom to sign the contract and where the fund to be transferred and invested when purchase financial products through the Internet platforms. If abnormalities are found, investors should consult the fund industry association or regulatory authorities in a timely manner.

Fourthly, investors must pay constant attention. After subscribing for PE fund products, investors should continue to pay attention to the investment and operation of the PE fund products, and require PE fund managers to fulfill their information disclosure obligation as agreed. If the manager is unable to contact with, the fund property is misappropriated and misappropriated, and the fund is facing significant risks, investor should promptly report to the securities regulatory authority or the fund industry association at the place where the PE fund manager is registered; if the PE fund manager is found to be suspected of fraud or illegal raising funds, investors must report to the public security and judicial organs in a timely manner.

Fifthly, investors must regularly study PE fund knowledge, the development of Internet technology and update financial business knowledge. Investors should regularly learn relevant knowledge when participating in high-risk investment businesses such as the PE fund investment, for instance, browsing the website of the regulatory authorities or fund industry associations, and reading newspapers and magazines. Investors should seriously distinguish relevant business or products, do not be fooled by so-called innovative products, ultra-high-yield, and do remember that "what you expect is profit, while what the other covet is your principal."


This article is extracted from the “Risk warning and prevention for investors" - Case of “Protecting Investor • Knowing Rules ,Identifying Risks” - “Dangerous Game” for Non-Qualified Investors on the official website of the China Securities Regulatory Commission.

Copyright:Tianjin Futong Xinmao Science and Technology Co., Ltd.  Jin ICP Record No. 13003376-1

Tel:022-83710998 Fax:022-83710199

Address:F16, Haitai Mansion, No. 6 Meiyuan Road, Huayuan Science & Technology Park of Tianjin Binhai High-tech Industrial Zone, Tianjin