Recent Ruling Helps China VCs but Still Requires Close Reading
Filed in archive Law on October 24, 2005
There were a few celebrations among venture capitalists in China last week, even if the recent regulatory changes in investment rules still requires a close reading of tea leaves to understand its full implications. The restrained hoopla is all about the State Administration for Foreign Exchange (SAFE ) repeal of so-called Circulars 11 and 29, two important documents that most VCs believe have curbed their efforts to invest in China companies.
According to Silicon Beat's Mike Marshall, "those circulars, the traditional model of investing has been to transfer ownership of a company's assets to an offshore entity, say in the Cayman Islands. These are known as Wholly Owned Foreign Entities, or WOFEs."
In the past, Silicon Valley VCs have invested in these entities, and were able to take a company public on the Nasdaq or somewhere else, without worrying about fighting through the legal morass, and risk of taking a Chinese company public on one of China's domestic, fairly weak, stock exchanges.
SAFE's earlier circular is a reflection of the government's clear obsession for currency control. In effect, Beijing succeeded in slowing down the 'era of me-too IPOs and insured profits from China's companies did not flow easily to foreign investors.
The latest news from SAFE is that they had finally reached an agreement with the Ministry of Commerce (MOFCOM), and fully recognized the importance and pressing need to replace the two offensive regulations with new and improved rules on investing, and M&As.
Many venture firms are hopeful about these latest new regulations aand even formally issued favorable comments on the government's decision to repeal the previous rules according to Jasmine Lin, deputy secretary general of the China Venture Capital Association (CVCA).
"We lobbied [SAFE] to get the new circulars to replace 11 and 29," she said. "The new circulars will accommodate the VC investment model for China to a great extent."
Sure, it's still a long march to complete financial transparency but it's a significant start. The translation or implementation of these new circulars means every entrepreneur must seek approval by SAFE for their business plans (including such information as who owns what) for holding companies overseas; disclose all of former offshore deal structures created by high profile attorneys and repatriate every penny raised in the offerings of those shares overseas back into China.
Who can blame China for making sure it collects its taxes to build more science parks among other things, but one thing for sure, it is still confusing and disquieting for some venture capitalists and China watchers.
Tags: SAFE new china venture recent requires+close still+requires close+reading
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