I. Types of Cross-Border Investment Funds
Overseas funds for cross-border investment can be divided according to different classification criteria. From the perspective of operational methods, they can be divided into closed-end funds, open-end funds and hybrid funds; from the perspective of investment carriers, they can be divided into corporate funds, partnership funds and contract funds; from the perspective of structural design, they can be divided into single funds, parallel funds, and mother-and-child funds; from the perspective of regulation, they can be divided into regulated funds and unregulated funds.
In China, all kinds of funds are supervised and managed by laws, regulations and competent organizations, but in foreign countries, some funds do not come within the scope of supervision. For example, in the Cayman Islands, the only mutual funds lawthat complies with the law is regulated by the Mutual Funds Law and the Cayman Islands Monetary Authority. Closed-end funds, funds that issue claims instead of equity, etc., are not supervised.
II. Establishment of Overseas Funds for Cross-Border Investment
Depending on the type and location of investment projects, there are different options for where an overseas fund for cross-border investment is established. It is worth mentioning that, thanks to the flexible financial policies and prosperous fund industry environment in the Cayman Islands, most of the cross-border investment overseas funds now choosethe Cayman Islands as their preferred location. The main organizational forms of the Cayman Fund include exempted companies, independent portfolio companies, exempted limited partnerships, and limited liability companies. In the Cayman Islands, closed-end funds are not considered mutual funds under the Mutual FundsAct and are therefore not subject to the Cayman Islands Monetary Authority. Taking the Cayman Islands as an example, the preparation of a typical exempted partnership investment fund usually requires the following procedures and documents:
1. Formulation of an Investment Plan
Before embarking on the preparation of relevant funds, investors should fully understand and have completed a thorough due diligence of the proposed investment projects, determine the fund structure and governance structure, the registered capital of the fund, and the progress of fundraising.
2. Establishment of an Investment Fund Entity
The Cayman Islands’ exempted partnership investment fund is an unincorporated entity that requires at least one ordinary partner, and requires that the general partner is a native Cayman local,a Cayman Islandscompany,another exempted partnership, a foreign company registered in Cayman, or a limited partnership. Among them, ordinary partners are jointly liable for the debt of the exempted partnership enterprise.The limited partner assumes responsibility for the debt of the exempted partnership enterprise with a limited amount of the committed capital, and the limited partner may not participate in the operations of the exempted partnership enterprise. An ordinary partner of an exempted partnership may be an investor in a fund management company with an exempted company system in the Cayman Islands. Cayman Islands law requires that the corporate shareholder in the local company must be a local Cayman resident, but the exempted companyis exempt from this condition.
3.Fundraising
After the establishment of the fund entity, the corresponding investor is required to make a capital contribution and actually enter into the partnership fund. If a change in the registered capital of the fund is involved, they shall also submit an application for change to the registration authority.
III. Domestic Supervision ofCross-Border Investments in Overseas Funds
For domestic investors, the establishment of a cross-border investment in overseas funds is a domestic institution’s outbound investment (ODI) and requires the approval, filing or registration procedures of the relevant domestic authorities. The regulatory authorities involved mainly include theNational Development and Reform Commission(NDRC), the commercial department, and the foreign exchange administration department. In addition, if cross-border investment funds or related investors are also involved in such issues as foreign debt issuance and the supervision of listed companies, they may also be subject to relevant supervision by the People’s Bank of China, the China Securities Regulatory Commission (hereinafter referred to as the “SFC”) and the stock exchange.
At the regulatory level of the NDRC, when a domestic investor establishes an offshore investment fund, he/she shall go throughthe relevant approval or filing procedures according to the specific investment situation. According to the newly released Administrative Measures for Outbound Investment, domestic investment entities can use the NDRC’s outbound investment management and service network systems for approving and filing procedures, and for reporting relevant information.
At the commercedepartment’s regulatory level, domestic investors must go through the filing or approval procedures according to different circumstances when setting up cross-border investments in overseas funds. Domestic investment entities may perform relevant filing or approval procedures through the commercedepartment’s outbound investment management system, and they must obtain aCorporate Outbound Investment Certificate before they can invest abroad.
At the level of foreign exchange management, China’s Foreign Exchange Management Regulations requires domestic entities to apply for foreign exchange registration for direct overseas investment, and they must go through the approval or filing procedure before the foreign exchange registration (if they are required to be approved or filed in advance by relevant departments). Since 2015, the State Administration of Foreign Exchange (SAFE)has simplified the foreign exchange formalities for outbound investments, canceled the administrative examination and authorizationforapproval of foreign exchange registration under foreign direct investment, but has required banks to directly review and handle foreign exchange registration under foreign direct investment. SAFE implements indirect supervision over the foreign exchange registration of direct investment through banks.
On January 18, 2018, the Ministry of Commerce, the People's Bank of China, the State-Owned Assets Supervision and Administration Commission of the State Council, the China Banking Regulatory Commission, the China Securities Regulatory Commission, the China Insurance Regulatory Commission, and the State Administration of Foreign Exchange jointly issuedInterim Measures for Filing (and Approving) Reports onForeign Investment in order to strengthen the management of filing (and approving) reports on outbound investment, and to establish and improve unified collection and sharing mechanisms for inter-departmental information. At the same time, the Ministry of Commerce has taken the lead in carrying out the “DoubleRandom, One Public” spot checks on outbound investments, and regularly conducts post-mortem monitoringof the authenticity, completeness and timeliness of the filing (and approving) of outbound investments.
IV. Analysis of Typical Cases of Cross-Border Investment in Overseas Funds
In recent years, more and more Chinese enterprises have made cross-border investments through overseas funds. [2]In 2006, the listed company Chongqing New Century Cruises Co., Ltd. (hereinafter referred to as “Century Cruise”) proposed to acquire the game business of Caesars Interactive Entertainment Inc. (hereinafter referred to as “CIE”). For this purpose, both parties registered Alpha Frontier Limited (hereinafter referred to as “Alpha”) in the Cayman Islands and Playtika Holdings, LLC (hereinafter referred to as “PH”) in Delaware, United States as an acquisition subject. CIE transferred its game business to PH, and on September 23, 2016, Alpha acquired CIE’s equity in PH for US$4.4098859 billion.
On October 20, 2016, having been registered by the NDRC and the Chongqing Foreign Trade and Economic Commission, and having obtained the Corporate Outbound Investment Certificate, thirteen counter-parties includingFanhai Capital Investment Management Group Co., Ltd., HongyiChuangling (Shanghai) Equity Investment Fund Partnership Co., Ltd. and Shanghai M&A Equity Investment Fund Partnership (limited partnership) Co., Ltd. acquired Class A common stock from Alpha. Alpha's Class B common stocks was held by Giant Investment (HK) Limited, a wholly-owned subsidiary of Century Cruises (Hong Kong).
On October 21, 2016, Century Cruises issued a draft trading report for buyingall of Alpha's Class A common stocks from 13 counter-parties with non-public issuance of shares and cash payments. The transaction price would be RMB 3.050352 billion, thereby allowing it to attain full control of Alpha. The structure of this transaction was as follows:
The design of the above-mentioned structure is a typical case of a cross-border merger and acquisition by a listed company with domestic and outbound investment funds. Cross-border investment funds provide financing for mergers and acquisitions. The partial payment of certain considerations by a listed company viaa targeted additional allotment of shares also provides a convenient exit route for investment funds and creates a win-win situation for both parties. However, this cross-border acquisition was not easy and received two pieces of feedback from the Shenzhen Stock Exchange and the China Securities Regulatory Commission. Although Century Cruises had already obtained the NDRC’s record for this transaction in February 2017, it has not passed the approval of the China Securities Regulatory Commissionso far.
Conclusion
Preparation work and designing of the overseas fund's structure must be doneby taking into full account multiple factors such as domestic and foreign regulatory systems, transaction time, transaction purposes and expenses, and building a suitable fund structure according to the fund’s actual situation. But, even with the same fund structure, there are still differences in the risks and uncertainties in the practice. In addition, domestic investors intending to set up overseas funds should also pay close attention to changes and trends in domestic regulatory policies. Any problems with the regulatory body’s examination and approval procedures may result in substantial obstacles to the preparation and establishment of overseas funds.
About the Author:
TengJie is a lawyer with a Bachelor’s degree inManagement, a Bachelor’s degree in Law, a Master’s in Law fromNankai University, and is also a doctoral student of civil and commercial law. He hasoffered a full range of legal services to a number of domestic and overseas fund projects, rendered a full range of legal services for offshore family trust scheme design, trust establishment and operation, and also contributed to “Family Trust Legal Theory and Case Analysis”, “Legal Principles and Case Studies of Asset Securitization”, and other writings.
Liu Hongyu is an assistant attorney with a Master’s in Law fromNankai University. He participated in a number of fund and trust projects, provided transaction plans for many companies, including investment and financing, mergers and acquisitions etc., and offering his legal opinion and other legal services. He participated in the preparation of “Family Trust Legal Theory and Case Analysis”.
[2]Chongqing New Century Cruises Co., Ltd. has been renamed “Giant Internet Group Co., Ltd.” Since June 9, 2017, the abbreviation of securities has been changed from “Century Cruise” to “Giant Network.”
