The Juristic Research Of The Trust Based Private Equity And Venture Capital

Private Equity(PE) and Venture Capital(VC) are developing in a high speed,there are increasing numbers of PE/VC companies emerging in China, there is evenan idiom calling this is an era of “nationwide PC”. In the meantime, the growth inthe trust market is catching the attention from the whole industry of assetmanagement. The tightening regulation policy introduced in2010is producing moreopportunities for the trust industry to take a “shortcut” in the competition with otherasset manage services. In2011the asset scale of trust industry has surpassed that ofthe fund industry, therefore the trust industry is becoming influential in the wholeasset management field. So some idea emerged: what if we combine these twopopular and powerful asset manage service together? Will it produce a fruitfuloutcome that is larger than the sum of its parts? Equity investment and venturecapitals usually take the form of corporation or partnership, in the year of2007, trustbased private equity investment first appeared in China, trust companies withdrewlarge scales of equity investment trust projects to the market, which received goodresponses. But due to some policies, the brief prosper did not last long and soonwent into a bottleneck situation.Trust system origins from the Great Britain, in the legacy of hundreds of years,it has made great contribution for the global economy. As the progress of ourmarket-oriented economy kept pushing, it is high time for our government toimprove our economic legislation. In this background, our nation issued the <TrustLaw of the People Republic of China> in2001. China banking regulatorycommission (CBRC) issued corresponding departmental rules after that, granting anintegrated law system for the trust industry, as well as theoretical supports andregulatory references for PE/VC.Under such circumstances, PE/VC have once became the focus of the wholeindustry, many trust companies and VC enterprises launched private equityinvestment trust projects, one of the most famous one was the “Hunan trust plans of assembled funds trust venture capital1” made by Hunan trust and Dachen venturecapital. However, the critical stage for investors of PE/VC, withdraw, came acrosswith some trouble. The most ideal method of withdraw for our PE/VC investorswould still be Initial Public Offerings (IPO). But when the CBRC issues IPOverifications, the actual information of the investors have to be revealed, which isagainst the principal of beneficiary information protection,33th regulation of the<Trust Law> regulates that the trustees must keep the confidential information forclients and beneficiaries. At the same time, most trust projects would involve morethan200people, which is against the <corporation law>. According to the windowinstructions of the CBRC, it is also not approved for trust companies play as existingshareholders and IPO. After that, the major trust organizations and VC enterprisesdesigned a new PE trust project, which is combining PE with limited partnership.Trust projects play as limited partners (LP), and professional fund managingcompanies play as general partners (GP). Because trust funds are not directly used ininvesting on target companies, when withdrawing via IPO channels, they are notsubjected to the aforementioned <trust law>,<corporation law> and the instructionsof CBRC. On December8th of2011, National Development and ReformCommission (NDRC) issued <Notice about to promote the development of equityinvestment enterprise specification>([2011]#2864issue). This “#2864issue” for thefirst time ruled about the “break through rule”. This so-called break through means“If the investors are unincorporated organizations such as assembled funds,partnerships trust investors, it should be broken through to verify if their ultimatenatural person or corporation are qualified investors, and break through thecalculation of the number of the investors, except for those who have Equityinvestment funds as investors.” The introduction of the break through rule greatlyaffected PE trust, because in PE trust, trust companies play as LP to invest on PEcorporations, they would be broken through to ultimate natural persons orcorporations, in which cases the investors can hardly meet request of thequalification and the population number. The break through rule forced many trustcompanies with the hope to isolate IPO withdraw difficulties with multiple structuresgive up their initial plans. This paper aims to discuss the past and future of PE/VC in our country, to givea juridical interpretation on this economical tool. As our market-oriented economygrows, PE/VC industries are coming to their golden age, taking more important rolesin our financial market. Although PE/VC is facing some juridical problems, theirviabilities are not diminished. It could be expected that when the inhibitive factorsrelieve and attenuated, the growth of trust PE will explode.The first chapter introduced the concept of trust and PE industries, as well astheir respective features and prevalence, providing a general view of my point.The second chapter introduced the relative juridical information for trust PE andVC, with an attempt to analyze the background of the origin of PE trust as well asthe reason why it is facing a bottle-neck.The third and fourth chapter is the core of this article, analyzed the currentorganization structures of trust PE/VC, illustrated with classic cases and figures, andcompared the pros and cons of each mode.The fourth chapter is personal interpretations on this matter, with analysis of thelimitation and preferable situations of trust PE/VC at first, followed by juridicaladvices and analysis.