The Legal Environment of Foreign-Invested Venture Capital Enterprises in China
Dr. Wen Chieh Wang
Since its inception after World War II, venture capital has had a profound impact on the US and world economy. Through the development of start-ups, innovation process and high-tech advances, venture capital has changed fundamentally the way we live and has played as one of the most powerful engines of the world economy. The concept and operation of venture capital were formally introduced to China in early 1980s, about the same period when Taiwan successfully established its venture capital and high-tech industries. However, the development of venture capital in China had been comparatively slow due to the prolonged transformation process from the planned economy into the market economy system. Besides, one of the major concerns is the lack of a comprehensive legal framework to accommodate the sophisticated operation mechanism of venture capital. Knowing venture capital is an important catalyst to foster its high-tech industries and economic growth, China has been getting serious in establishing and perfecting its policy and regulatory framework. Both the central and local governments have been active in introducing related legislation in recent years. This article focuses on China’s recently adopted “Regulation on Administration of Foreign-Invested Venture Capital Enterprises” (the “2003 Rules”), which was effective from March 1, 2003 and superseded the “Provisional Regulation on the Establishment of Foreign-Invested Venture Capital Enterprises”(the “2001 Rules”), which had been in operation for only 18 months. The 2003 Rules represents a substantial re-write of the 2001 Rules. There are major breakthroughs in relaxation of terms and conditions for foreign investors to enter and exit China’s venture capital market. Moreover, the 2003 Rules provides a practical structure effectively similar to the limited partnership in US and allows the establishment of “venture capital management enterprises” which are both familiar to international fund investors and venture capitalists. While the 2003 Rules is much more practical in handling the operation mechanism of venture capital, there are still many questions remain unanswered in the context of China’s legal framework because of its conflicts with the Company Law, Partnership Law and others. Further, the author surprisingly found several most updated regulations enacted by various local governments are not in compliance with the 2003 Rules. All these conflicts create not only confusion to the foreign investors but also uncertainties in the investments. Besides the 2003 Rules, this article analyzes the obstacles in related laws and regulations that may hinder the development of venture capital, mainly the fund raising constraints, the lack of tax incentives and lack of exit mechanism, especially the best mode of exit, i.e., initial public offerings (IPO) in the proposed “Second Board” or “Growth Enterprises Market Board”( GEM Board) in China.
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