On March 1, 2018, the Administrative Measures for Outbound Investments by Enterprises (企业境外投资管理办法) (“Circular 11”) issued by the National Development and Reform Commission (the “NDRC”) went into effect. In addition to regulating direct outbound investments by Chinese companies in general, Circular 11 introduces a new regulatory framework administered by the NDRC governing Chinese companies’ sponsorship of, and investment in, offshore private equity investment funds.
In summary, Circular 11 requires a Chinese company that is sponsoring or investing in:
A. Casting a Wider Net
Domestic Chinese companies, as well as any offshore entities controlled by such companies or by Chinese individuals, are subject to Circular 11’s regulatory regime. Circular 11 applies to two important groups of Chinese investors that have been active in the private equity investment funds space but were not previously covered:
B. Seal of Approval
Circular 11 has significant implications for the sponsorship of and investment in Regulated Funds, either by a Chinese company directly or by an offshore entity controlled by a Chinese company or individual:
C. Great Uncertainties
Because Circular 11 just went into effect on March 1, 2018, there remains great uncertainty regarding its interpretation, application and impact on market participants:
Because of these uncertainties, Chinese investors are asking fund sponsors to provide solutions in anticipation of their admission into Regulated Funds:
Until the NDRC issues further guidance on the interpretation and application of Circular 11, or until market participants have had more experience dealing with the NDRC, both fund sponsors and investors will be “crossing the river by feeling the stones” as they consider their approach to outbound investments in offshore private equity investment funds and, in particular, Regulated Funds.
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 “Sensitive projects” include (i) projects involving sensitive countries and regions and (ii) projects involving “sensitive industries,” which include (a) the research, manufacturing and repair of weapons; (b) the development and use of cross-border water resources; (c) news and media; and (d) any industries to be restricted according to the Notice of the General Office of the State Council on Forwarding the Guiding Opinions of the National Development and Reform Commission, the Ministry of Commerce, the People’s Bank of China and the Ministry of Foreign Affairs on Further Guiding and Regulating Outbound Investment Orientation (Guo Ban Fa  No. 74), including real estate, hotels, cinemas, entertainment, sport clubs, as well as establishing offshore private equity investment funds or investment platforms without specific industrial projects.
 “Control” is defined as holding, directly or indirectly, a majority of the voting rights of an entity, or being able to direct the operations, finance, personnel, technology, or other important matters of such entity.
 Direct investments made by Chinese natural persons are not within the scope of Circular 11.