Private Equity Deals Still SAFE and Sound

Filed in archive Law on August 29, 2005

With at least four major China private equity conferences scheduled before year- end, one prominent track orchestrated by many high profile international law firms, will address the challenges faced by private equity investors from China's recent foreign exchange regulations resticting the use offshore-based holding companies.

The offshore holding company structure widely used by Chinese entrepreneurs to obtain overseas venture capital and private equity investment, engage in cross-border trade sales, and undertake overseas initial public offerings has been significantly impacted by two new circulars from the State Administration of Foreign Exchange (SAFE).

Venture Capital Journal believes that while mainstream media has been splashing the big successful Baidu story, "the on the ground story in Beijing is much different. Investments in Chinese companies by foreign (read U.S.) venture capital firms have virtually ground to a halt due to these new government regulations."

According to Morrison Foerster, an international law firm with significant talent in China, "A PRC founder must now register and obtain approval from SAFE prior to acquiring an equity interest in an offshore holding company. SAFE is able to enforce such restrictions by withholding the issuance of enterprise foreign exchange certificates and restricting the distribution of domestic assets to its offshore parent. Historically SAFE has been reluctant to approve outbound investments by corporate persons and now appears to be imposing the same reluctance on individual investors. "

Private Equity Week has also confirmed a dramatic slowdown for law firms attributed drectly to the impact of the regulation. Some observers speculate as first reported here, that new regulations will be established as early as year-end, which will provide a more consistent approach and process to the issues addressing these onerous regulations. So, no need to feel despondent over any dip in the law firms hourly Billings.