Proposed changes in China spark concerns among venture capital and private equity funds

In a move that has stirred controversy within China’s financial circles, the country’s securities regulators recently unveiled draft rules proposing a substantial increase in the investment threshold for private equity (PE) and venture capital (VC) funds. Industry players are expressing concerns that these stringent measures could disproportionately impact small funds and hinder financing for startups already grappling with economic challenges.

The draft rules, published late last Friday, 8 December, 2023, by the China Securities Regulatory Commission (CSRC), outline a threefold increase in the minimum investment required for qualified investors in PE and VC funds. Under the proposed regulations, investors would need to commit a minimum of 3 million yuan, or $418,731, aiming to safeguard small investors in the sector.

For funds heavily invested in a specific company or project, the individual investor threshold is set even higher at 10 million yuan, up from the previous 1 million yuan. Abraham Zhang, Chairman of China Europe Capital, a Shenzhen-based venture capital firm with a focus on technology, expressed concerns. He stated that the new, stringent rules would worsen the challenges for small players, potentially digging their graves. This comes at a time when the industry is already grappling with a challenging economic climate.

Fundraising by newly established PE and VC funds in China witnessed a 20% decline during the first nine months of 2023, according to consultancy Zero2IPO. The weakened economy and volatile stock market have dampened risk appetite, particularly impacting smaller, early-stage venture funds that often rely on high-net-worth individual investors.

Li Gangqiang, a veteran venture capitalist and co-founder of Beijing Potential Shares Technology Co., emphasized the potential devastation of single-project funds favored by individual investors. In a blog post, Li predicted that at least 1,000 private fund management firms could face elimination if the proposed rules take effect.

Despite the CSRC’s assertion that the rules are designed to protect small investors, industry experts argue that the new policies may have unintended consequences. Andrew Qian, CEO of Shanghai-based New Access Capital, criticized the move. He mentioned that in a tough fundraising environment, it seemed like spreading salt on the wound. According to him, this runs counter to government support for early-stage tech startups.

The impact on fundraising is already evident, with China-focused, yuan-denominated PE funds raising only $9.7 billion so far in 2023, compared to $33.7 billion in 2022 and $116.6 billion in 2021, marking the lowest since the year 2010.

Additionally, no China-focused buyout fund has been raised in 2023 in any currency, further underscoring the challenges facing the industry.

VC veteran Andrew Qian stressed the need for differentiated regulation, particularly for VC funds targeting smaller investors. He highlighted the contrast with overseas practices, where angel investment is accessible to ordinary people, criticizing the potential closure of doors to such investors in China, making fundraising even more challenging.