Four private equity funds in Shenzhen were fined for violations such as promising investors capital protection

Nandu News reporter Ye Linfang China Foundation Association announced 9 disciplinary punishment decisions in the past 1 month, and 4 private placements in Shenzhen were fined, of which 2 were revoked from the registration of private placement managers, and the other 2 were punished by suspension of business to varying degrees. Nandu reporter combed the facts of the violation pointed out by the China Foundation Association and saw that promising investors to guarantee the principal and guarantee the income is a "common disease" of the 4 private placements. As early as the end of 2020, the China Securities Regulatory Commission (CSRC) issued the Several Provisions on Strengthening the Supervision of Private Equity Investment Funds, which detailed the prohibited behavior requirements that private equity funds should not promise investors to guarantee capital and guarantee returns in the process of re-examining private funds, emphasizing the need to guide private funds to return to the investment essence of "benefit sharing and risk sharing".

Zhongke Jierui, Rongtai Huitong:

Make capital guarantee commitments to other private equity institutional investors

In the past month, the Asset Management Association of China (hereinafter referred to as "AMAC") has issued nine disciplinary decisions for private equity institutions, of which two private placements in Shenzhen: Shenzhen Zhongke Jierui Investment Management Co., Ltd. (hereinafter referred to as "Zhongke Jierui") and Shenzhen Rongtai Huitong Investment Co., Ltd. (hereinafter referred to as "Rongtai Huitong") have been deregistered as private equity managers.

In terms of the facts of the violations reported by the China Foundation Association, Zhongke Jierui and Rongtai Huitong are highly consistent. After verification by the China Foundation Association, on January 7, 2020, Li Pingping, the legal representative of Zhongke Jierui, and Li Xiang, general manager of Rongtai Huitong, signed a "Letter of Commitment" to an investor, and the investment products invested by the investor were "Fangji Zhengfan No. 1 Private Securities Investment Fund" and "Zhengfan Shunfeng No. 2 Private Securities Investment Fund" managed by Shenzhen Qianhai Zhengfan Investment Management Co., Ltd. In the letter, the two parties agreed that Li Pingping and Li Xiang promised investors that "the investment fund can recover the principal and obtain 10% annualized investment income in the future".

If the total amount of future distribution by the relevant fund to the investor (including all income from the period dividends, share redemption income, liquidation distribution, etc.) is less than the principal of the investment and the annualized 10% income is added, the difference will be made up by Li Pingping and Li Xiang in cash. The Association pointed out that the above acts of Zhongke Jierui and Rongtai Huitong violated Article 4 of the Measures for the Supervision of Private Equity Funds and Article 4 of the Measures for the Administration of Private Equity Investment Fund Raising.

It is worth mentioning that the official website of the China Foundation Association shows that Zhongke Jierui has no fund under management at present, and Rongtai Huitong has a fund under management of less than 2 million in the past year. In addition, according to the announcement of the China Foundation Association, the two private equity institutions did not cooperate in the on-site inspection of the association, and they were no longer working in the office place registered with the association.

In this regard, the China Foundation Association revoked the registration of the private fund managers of Zhongke Jierui and Rongtai Huitong.

Shenzhen Yuan Song, Shenzhen Hanxin:

It is illegal to "pay" for investors' investment risks

In addition to the above two private equity institutions, Shenzhen Yuansong Investment Management Co., Ltd. (hereinafter referred to as "Shenzhen Yuansong") and Shenzhen Hanxin Asset Management Co., Ltd. (hereinafter referred to as "Shenzhen Hanxin") also have the problem of promising investors to guarantee the principal and guarantee the returns.

After the investigation of the China Foundation Association, the Shenzhen Yuansong salesman used terms such as "safe and stable" when introducing the private equity products managed by him, causing customers to mistakenly believe that the fund products were not risky, so in 2018, due to the decline in the net value of the fund, after investors demanded redemption, Shenzhen Yuansong designated its sole shareholder, Guangzhou Chentian Investment Group Co., Ltd. (hereinafter referred to as "Guangzhou Chentian") on the grounds of "ensuring the normal operation of the company and operating as usual" and "avoiding the redemption of the fund by all investors" under the condition of knowing non-compliance. Signed a "Repurchase Agreement" with 7 investors who communicated with 7 on-site investors, stipulating that Guangzhou Chentian would repurchase the shares of fund products held by 7 investors and make up the difference according to the annualized 9% return.

Shenzhen Hanxin's two fund products signed a fund share redemption agreement, a supplementary agreement or a fund share holding agreement with the investor, promising that when the investor redeems the fund share, the net value of the fund share is less than 0.9 yuan, and the manager will make up for it with its own funds. Shenzhen Hanxin paid the difference to the investor in accordance with the agreement.

The Association pointed out that Shenzhen Hanxin's act of contributing capital to bear part of the principal loss of investors violates the investment essence of private equity funds entrusted with financial management, and is a disguised promise to investors that the principal will not be lost.

Under the background of the new domestic asset management regulations breaking the rigid payment and the transformation of the net value of wealth management products, the regulatory level has long clarified the illegal nature of the financial institutions' commitment to guarantee the principal and guarantee the returns. At the end of 2020, the China Securities Regulatory Commission (CSRC) issued the Several Provisions on Strengthening the Supervision of Private Equity Investment Funds, which details the prohibited behavior requirements that private equity funds must not promise investors to guarantee the principal and guaranteed returns in the process of re-examining private funds, emphasizing the need to guide private equity funds to return to the investment essence of "benefit sharing and risk sharing".

At the investor level, there are actually many hidden risks in the commitment of the fund manager to guarantee the return of the principal. Zhong Lun Law Firm's March 2021 research article pointed out that in past judicial practice, the court usually supports the promise of principal guaranteed income provided by an external third party, but there are different results and reasons for the determination of the guaranteed income commitment provided by the trustee in the entrusted investment relationship such as the fund manager: (1) the determination is invalid, and the reason for the invalidity is usually that the guaranteed income violates the connotation of the legal system of risk sharing and entrustment agency; (2) the determination is valid. The valid reason is usually that the agreement on the guaranteed bottom income is the true intention of the parties, and does not violate the mandatory provisions of laws and administrative regulations (the relevant regulatory provisions of the CSRC are not mandatory legal provisions of laws and administrative regulations) ;(3) There are also courts that penetrate the essence to determine that the agreement on the guaranteed bottom income is a loan in the form of entrusted investment, which is treated as a private loan.

Material Information Violation Facts:

Shenzhen Yuan Song Fund Products Private Placement

Nested structures inflate investor costs

In addition to the disguised promise to investors to guarantee the principal and guaranteed returns, the China Foundation Association pointed out that Shenzhen Yuansong also had major information violations that did not disclose to investors that may affect their legitimate rights and interests.

On June 22, 2016, Shenzhen Yuansong established the "Yuancheng Wen 8 Fund" product, which is mainly invested in the "Wise No. 1 Fund" managed by Guangdong Lingxin Investment Co., Ltd. (hereinafter referred to as "Guangdong Lingxin"). Five days later, Shenzhen Yuansong signed the "Project Cooperation Agreement" with Guangdong Lingxin, stipulating that Shenzhen Yuansong would be responsible for the specific investment direction and transfer instructions of the "Wise No. 1 Fund", and all the performance remuneration generated would go to Shenzhen Yuansong.

Among the many funds re-invested by the "Wise No. 1 Fund", including 8 private equity funds managed by Shenzhen Yuansong, 5 private equity funds managed by its related party Dongguan Yuancheng Investment Management Co., Ltd. (hereinafter referred to as "Dongguan Yuancheng"), 8 private equity funds managed by other private fund managers and 1 trust plan, many of which independently collect management fees.

The nested structure arrangement of the above products has greatly increased the investment cost of the investors of the "YuanCheng Stable 8 Fund". At the same time, after Shenzhen Yuansong invested the "Yuancheng Stable 8 Fund" mainly in the "Zhizhi No. 1 Fund", the investment behavior of the private equity fund under its own management and the private equity fund managed by its related party Dongguan Yuancheng was a related party transaction.

The Association pointed out that in view of the multiple management fee arrangements and related party transactions undertaken by the aforementioned fund, which may affect the legitimate rights and interests of investors, the Company admitted that it had not disclosed it to investors. The above conduct violates Article 24 of the Measures for the Supervision of Private Equity Funds and Article 9 of the Measures for the Administration of Information Disclosure of Private Equity Investment Funds (hereinafter referred to as the Measures).

In addition, Shenzhen Yuansong also had imperfect internal control and failed to disclose to investors the annual operation report of the fund and the violation of the net value of the fund shares as agreed. The Association publicly condemned Shenzhen Yuan Song and suspended the filing of its private fund products for 12 months. Shenzhen Hanxin received a written warning, made corrections within a time limit and suspended the acceptance of private fund filings for three months due to the failure to disclose five violations to investors, including litigation-related information.