Legal Regulation Research Of Chinese Privately-offered Securities

This article is a systematic research on legal regulation concerning Chinese privately-offered securities and the first Chinese research views such subject in the perspective of issuing, resale, legal responsibility. Privately-offered securities in China emerges in the needs of the market and through spontaneous initiative, and achieved a rapid development in recent years, which finally noticed by the government's securities regulation.Under widely financial repression and regulation, privately-offered securities existed between facts and norms in the past 10 years. Meanwhile, Chinese laws are limited on securities' specification. So nowadays, privately-offered securities are still in the gloom of illegal fund collection.Despite of lagged legislation, regulation and jurisdiction, privately-offered securities market in China has already had a great development. The article illustrates the development with three phases. The first phase of the development was internal financing during 1980s and private placement during 1990s; The second phase was mainly"Quasi-non-public offering"in the financial industry, such as financial plans of merchant banks, pooled investment instruments, subprime mortgage-backed bonds, specified distribution, etc.. The third phase is privately-offered funds, overwhelmingly popular in recent years, which include two types: private security funds, among which the most noticeable is the"entrusted private security fund", and private equity fund. The three types of privately-offered securities including private offering stock, private offering bonds and private offering fund have a great development in each area.There is one thing needed to explain further that is"entrusted private security fund"now mainly regulated by the laws like"Trust Law"and so on. One of the reasons why this article researches on different types of private offering fund including"entrusted private security"is that China needs to do more explanation on"securities". Furthermore, the"Law on Funds for Investment in Securities"which is now revised has already explained more on"securities", and plans to adjust private offering fund. Based on this, considering the limited laws on Chinese private offering stock and private offering bonds, this revised of"Law on Funds for Investment in Securities"will offer a good research sample and perspective.Looking back on the legislation on securities and finance, we would find that China has been giving positive responses to privately-offered securities by enacting legislations and amendments. For example, in the"Securities Law", which was put into effect in Jan 1st, 2006, the tenth item has officially recognized privately-offered securities. More regulations relevant to privately-offered securities have been announced by government supervision sectors, such as"Trial Implementation Measures for the Customer Asset Management Business of Securities Companies", etc. The controversial matters concerning the regulation of privately-offered securities are also listed in the legislative agenda of the Standing Committee of National People's Congress in the year of 2011.The rapid development of privately-offered securities has attracted increasingly number of investors and capitals, but some problems have been exposed, such as the problem of investor protection, the potential systematic risks to the securities market, etc. In the background of the financial globalization, the worries of China's legislators and regulators about these serious problems are not out of nothing. From the international point of view, since the global financial crisis resulted by the USA's subprime crisis in 2007, the USA and European Union countries (regions) have reconsidered thoroughly the regulation of the hedge-fund-represented privately-offered securities, and made amendments to regulations. The government regulation has been conducting more strict investigations into Wall Street hedge funds for illegal transactions such as insider trading.The repaid development market and increasing exposed risks show that the legislation of Chinese privately-offered securities needs to speed up. Meanwhile, in the perspective of institution economics, as a system arrangement, the law must respond to the social and market needs. The economic essence of privately-offered securities is a financing arrangement, and with lower cost and more flexible and concise procedure, compared to public offering financing or bank credit financing. Especially, to the many small-and-medium-sized enterprises, the existence of privately-offered securities has its objective necessity. From the point view of macroeconomics, the development of small-and-medium-sized enterprises is more about the development of Chinese economic and overall social welfare level.Seen from macro-perspective of the evolutionary history of domestic and foreign laws concerning securities, the mainline is the balance of financing needs, market efficiency and investor protection. Aside with development of modern security market, the investor protection has become the priority in the legislation concerning securities all over the world. Therefore, this article attempts to answer the following questions systematically from the perspective of legal system, and give suggestion on Chinese privately-offered securities'legislation, regulation and jurisdiction in the future.What are the privately-offered securities? What is the economic and social background of the existence of private-offered securities? What's the gap concerning privately-offered securities between China's legislative system and the needs of the market? Where are deficiencies in China's legislative system relating to privately-offered securities? How China's legislative system is to be perfected?The USA has provided other countries (regions) with valuable experience in the legislation for privately-offered securities. Started with Section 4(2) in the Security Act of 1933, then Regulation D in1982, followed by Rule 144 and Rule 144A, the USA has accumulated experience and lessons in legislation, judicature and system of the issuance, resale and other aspects. Then the privately-offered securities'legal system of Japan and Taiwan district almost copied the American. These overseas experiences can be directly borrowed by China. Considering that America is the most perfect on global privately-offered securities'legal system and Chinese privately-offered securities'legal system is limited, the article attempts to give suggestion on Chinese privately-offered securities'rules and regulation, thus, the author did systematically comparison and research with the sample of America.Regarding to the arrangement of writing structure, despite of"Introduction"and"Conclusion", the main contents are divided into 5 chapters which are as followings: Chapter 1: The background of China's privately-offered securities; Chapter 2: The construction of issuance legal system of privately-offered securities; Chapter 3: The balance among privately-offered securities'resale, restriction and negotiability; Chapter 4: The liability of privately-offered securities: save and punish; Chapter 5: The legislation of privately-offered securities: used revised"Law on Funds for Investment in Securities"as a sample. The structure arrangement of textbook is because Chinese privately-offered securities legal system has a few spot questions and much legislative deficiency on issuance, resell and legal responsibility. More importantly, the relationship among issuance, resale and legal responsibility is close, and each is non-separation part in privately-offered securities legal regulation. Chapter 5 attempts to apply the theoretical research conclusion of to the hot spot of China's privately-offered securities'legal regulation nowadays that is the revision of"Law on Funds for Investment in Securities". With the lack of systematical legislation experience of privately-offered securities in China, the revision of"Law on Funds for Investment in Securities"gives this article an effective research sample .Briefly speaking, the context of five chapters is as following:Chapter 1: The background of China's privately-offered securities. This chapter firstly attempts to define"securities"and"private placement"in the theoretical level. From the point view of this article, the core difference between private placement and public offering is whether investors have the protection ability so that they do not need the protection from ethical standards of securities'issuance. Secondly, the author analyzes the present regulations and laws in China regarding securities and private placements, followed by comparison to what they"ought to be", to get the conclusion that China's"Securities Law"and relevant regulations have defined"securities"in a more narrow way than it"ought to be", which needs to be explained more at least includes private offering fund, and the security-related regulations which are still in embryo status and reveals all the details are not practical and filled with deficiencies. However, legislative deficiencies did not prevent the market from innovation. China's privately-offered securities in the past five years grow"wildly"and development quickly. China's privately-offered stocks, funds and bonds are increasing steadily in accordance with regulations from all levels of the government. The emergence of the China's privately-offered securities market has its deep systematic background: the prevalent existence of financing need, financing difficulties under financial pressure and the presence of accredited investors, stimulated by financial innovation, are integrated in pursue of maximum profit. Put into comparison of the present status of privately-offered security market and the existing regulations, it is obvious that the gap between the actual market and the legislative system relevant to China's privately-offered security, shortly,"market goes, regulation follows", which requires synchronization. In view of the rapid growth of the size of the privately-offered securities, the vagueness and omission of legislative system, and the deficiency and the exceeding of supervision, it is more and more urgent to enhance privately-offered securities'legal system.Chapter 2: The construction of issuance legal system of privately-offered securities. The issuance system is one of the basic elements to protect privately-offered securities investors. Thus, on the basis the issuance of privately-offered securities defined in Chapter 1, this chapter focuses on the deconstruction of each link and essence of the issuance of privately-offered securities, and, in view of the USA's experience, provides with feasible suggestions for the perfection of China's issuance system of privately-offered securities. In logical viewpoint, the issuance system can be deconstructed mainly into the following essences: (1) The qualification of entity in issuance, i.e. the eligibility of the issuer. (2) The qualification of investors, i.e. qualified investor system; and the determination of "particular investors"in"Securities Law"of China, which is the core of the privately-offered security issuance system. (3) The government's approval mechanism of the issuance of privately-offered security. (4) The information disclosure mechanism of private-offered issuance. (5) The means of the issuer to offer and sell security to potential investors in the process of the issuance. The definition of"non-public way"is highlighted. Considering the fact that the privately-offered issuance is only available to the investor with self-protection ability, the article suggests that The system building of qualified investor can be"firstly strict and loose then", financial after institutions like commercial bank and social insurance fund confirm the qualified investor, other investment institutions define in the aspects of"maturity"and"wealth", the qualified natural person can be defined from three aspects including"maturity","wealth"and"relationship"; About the auditing, from the view of this article, China's privately-offered securities' issuance should not just copied USA exemption system, filling system afterwards is suggested; In the aspect of information disclosure, the article suggests that according to different privately-offered securities' investors there should be different information disclosure mechanism, but the basic information of disclosure need to be unified, and that allow and encourage the private-offered insurer make a disclosure of information actively; Considering the"Non-public way", the article figures that the clause which obeys to this principle in current related rules should be abolished, meanwhile about the promotion by Internet and sale of privately-offered securities, the procedures like"investigation on investors in advance, protection of web site's password"should be strictly ruled.Chapter 3: The balance among private-offered securities' resale, restriction and negotiability. Resale which is the assignment after the privately-offered securities' issuance is not only the privately-offered securities' investors' necessary appeal, but also is the attribute embodiment of liquidity as a product of financial investment. From the theoretical point of view, there are two ways to resell privately-offered securities: the first way is to resell through approval procedures; the second way is to seek exemption from approval or registration. From the consideration of costs and profits, the privately-offered security holder will choose the second way with no doubts. If the privately-offered securities'holder wants to enjoy the approval exemption, one must have the evidence of investor of privately-offered securities but not the underwriter of securities. Because once presumed as an underwriter, the resale will make the design of issuance system of privately-offered securities impracticable. America offered two good examples on this, which are Rule 144 and Rule 144A. The idea of American resale system of privately-offered securities is that the resale requirements of the issuer affiliates are stricter than non-affiliates, the limits of the resale shall be eased as the time elapses, and more credits will be put on QIB to broaden the resale limits, etc. among these concepts, the essence of the privately-offered security resale is the"holding periods". The regulations concerning resale of privately-offered securities in China have already been made, but in a rough way. The qualification of resale, resale to what kind of investors, information disclosure and number restriction when does the resale and the market for resale still require further definitions. This article suggests that the general resale, resale with qualified investors and reactive alteration of ownership of privately-offered securities can be treated and ruled differently. Meanwhile, the conditions that the general resale can enjoy the approval exemption include qualified holding periods, feasible information disclosure and qualified resale restriction on number. Besides strengthening the legislation of the resale, China requires to enhance the construction of curb market and construct multi-level capital market system in order to provide with a place for privately-offered security's issuance and resale. The article suggests that the issuance and resale of privately-offered securities can be brought into"the third board market".Chapter 4: The liability of privately-offered securities: save and punish. The lack of liability will lead to the invalidation of the legal system of privately-offered securities. The construction of scientific and strict liability system is not only an important part of the legislation of privately-offered securities, but also a powerful guarantee for investors'rights and interests. Theoretically speaking, the liability of privately-offered securities is consisted with three parts including civil liability, administrative liability and criminal liability, each of which has its function. The article finds that the illegal behaviors of privately-offered securities are mainly about illegality of issuance, resale and fictitious illustration. However, despite of that compared to which of publicly-offered securities is mainly about market rigging and inside trading; In the perspective of civil liability, privately-offered securities investors have the ability of protection, and also the almost equal ability to the privately-offered securities issuer and intermediate body in the issuance and resale sections, so the"Contract Law"is more applicable; In the perspective of administrative liability, considering the fact that the regulation of privately-offered securities is less than publicly-offered securities, the range of administrative liability of privately-offered securities is narrower than that of publicly-offered securities. In the perspective of criminal liability, the reality problem of privately-offered securities is to have a clear boundary with illegal financing. Based on the analysis of current securities'liability rules, the article figures that the concepts of privately-offered securities'liability are both about civil affairs and administration. In the perspective of civil liability, privately-offered securities should be included in the applicable range of securities'anti-fraud rules such as"Rules about civil compensation led by fictitious illustration when cogitating the securities' market"; Considering the administrative liability, related bodies of privately-offered securities should be included in the regulative range of administrative rules like"Provisions on Banning the Entry into the Securities Market". About the criminal liability, the behavior of ruling by secondary financing other than direct financing should be avoided, and the conditions of current illegal financing can be included in the regulative range of securities rules.Chapter 5: The legislation of privately-offered securities: using the revised"Law on Funds for Investment in Securities"as a sample. From the theoretical point of view, the legal system of privately-offered securities is consisted by legislation, regulation and jurisdiction, and the premise of regulation and jurisdiction is legislation. However, the legislation of Chinese privately-offered securities is not perfect, plus the current financial supervision system is"divided operation and divided supervision", that requires privately-offered securities be clearer in the supervision system, principle and goals parts. Meanwhile, there are big difference on regulation system among privately-offered stocks, privately-offered bonds and privately-offered funds. Moreover, Chinese public jurisdiction cases of privately-offered securities are lack, some essential cases of privately-offered securities are decided according to"Company Law","Contract Law"and"Criminal Law". Fortunately, as a valid research sample, privately-offered fund will be included in the regulative range of the revised"Law on Funds for Investment in Securities"promoted by the Standing Committee of National People's Congress. Thus, this chapter attempts to apply the research conclusion of previous four chapters to current revised"Law on Funds for Investment in Securities". Firstly, moderate and unified supervision principle is suggested; Then, the article deeply researches on the legal system of"private security fund"which is now the most concerned and controversial in Chinese privately-offered funds, and finds that there have six problems such as the disunity of investor definition, the chaos of selling and promoting ways, and the unspecified definition on investment consultant Besides, the supervision concept shows dual attributes of half-privately-offered securities and half-publicly-offered securities; Lastly, after deeply discussing the core question of moderate regulation boundary of ruling Chinese privately-offered funds, the article suggests that the protection fund of privately-offered securities'investors should be set up,"Non-public department"should be set under the China Securities Regulatory Commission to take charge of privately-offered funds and privately-offered securities'regulation uniform, and specific association should be set under China Securities Association to take charge of self-regulation of privately-offered securities. Considering the rules of fund managers who can deal with privately-offered securities and publicly-offered securities at the same time suggested by"Law on Funds for Investment in Securities"(draft amendment) (exposure draft), the article figures that this suggestion should be very carefully treated, as it has the potential risks in benefit delivery and illegal transaction.It is to be mentioned that throughout this article, the research always concerns and responds to the local privately-offered securities in China, but the legislation supervision and market experience are still on the starting line, so this article takes the mature overboard experience, especially the USA which is typical and of wide influence, as samples and reference systems. With the systematical comparison and research, the article attempts to find the experience that can be borrowed by China. From experience, the USA's legislative system on privately-offered securities focuses on balance and coordination between each targets: financing convenience and investor protection, market needs and regulation, and efficiency and fairness, etc. But at the same time, the maturity of the USA's legal system is not built in one day. In the 80-year evolution process, there are violent debates, failures, and shortly recession.During the process of writing, the author feels that the legal regulation of privately-offered securities is much more complicated than expectation deeply. Thus, the author sticks to analysis the common characters and differences of the legal regulation of privately-offered securities objectively. There are three types of privately-offered securities in China: privately-offered stock, privately-offered debt, private fund. They have common characters in legal regulation, especially in offering sector, and also have a certain differences, such as resale. It isn't difficult to understand, and the publicly-offered securities have the same phenomenon. The article focuses on the common characters of the legal regulation of privately-offered securities all along and pays moderate attention to the differences.This article adopts legal analysis, economic analysis, comparison analysis, and demonstration analysis in writing. Compared with present researches, this article is, to a certain extent, innovative, which represented by the followings: firstly, in the perspective of legal regulation, it researches systematically the present status, system background, the construction of issuance and resale system, and liability of China's privately-offered securities; secondly, it precisely analyzes and concludes the recent year's evolution of the USA's privately-offered securities supervision system, which includes SEC's suggestions in 2007 of making amendments to Regulation D, re-consideration of the USA's academics and supervision departments and new legislation measures after subprime crisis, etc., and concludes these into experience and lessons for China's reference; Thirdly, in the section of issuance of privately-offered securities, after deeply analysis Chinese privately-offered securities investors, the article suggests applicable ideas and also how issuance of privately-offered securities can make a use of Internet; Fourthly, in the section of privately-offered securities resale, the article advises China's privately-offered securities' issuance and resale can be included into the"the third board market"which plans to extend; Fifthly, the article compares the liability of privately-offered securities and publicly-offered securities; Sixthly, the article gives suggestion on how the privately-offered fund brought into the current revised"Law on Funds for Investment in Securities"both in theoretical and practical levels.As for the China, the privately-offered securities will be, without doubt, important component of China's capital market. Certainly, no matter what kinds of plans are made by the supervision departments for privately-offered securities in short-term, medium-term, or even long-term, the legal system shall be always rooted in China's capital market, security law system and the status of the whole society. One of the most important point is that, in the process of constructing the legal system of privately-offered securities market, and in view of the China's securities market's"newly-rising and transforming"feature, the protection of the investors is of the greatest importance, besides the considerations for market risk prevention and other goals.In the end, frankly, it took one and half year hard-working in reading, studying, and researching of the various information on privately-offered securities system, and the author continued to add new information and consult relevant specialists and scholars, but some deficiencies still exists in this article. For example, the lack of statistics of China's present status in privately-offered securities from authority sources, results in the lack of convincing quantified analyses; some parts of the research on privately-offered securities supervision are still scattered and not deep enough; the researches on private-offered-securities-related legal system is shallow and short of demonstration researches, the lack of foreign countries' privately-offered securities'legal system other than the America. In a word, privately-offered securities'legal system in China is a magnificent and new subject with strong theoretical and practical attributes, among of which there is commonality of legal system in private-offered stocks, privately-offered securities bonds and privately-offered funds. The article attempts to integrate this law topic, and those deficiencies are to be studied and researched further by the author in the future.