SAFE Issues Revamped Rules on Round-Tripping Investments by PRC Residents

The State Administration of Foreign Exchange ("SAFE") issued the Relevant Foreign Exchange Administration Issues on People's Republic of China Residents Investing, Raising Finance Overseas and Engaging in Round-tripping Investment through Special Purpose Vehicles [Huifa No. 37] on 4 July 2014 ("Circular 37"). Circular 37 took effect on the same date. Circular 37 replaces the Relevant Issues on People's Republic of China Residents Engaging in Financing and Round-tripping Investments through Overseas Special Purpose Vehicles [Huifa No. 75] ("Circular 75") which was also issued by SAFE almost ten years ago on 21 October 2005.

Circular 75 has, for almost a decade, been the centreprice of regulatory concerns for PRC resident entrepreneurs and investors in any transaction involving the setting up of offshore entities for fund raising purposes and the use of such funds in the PRC. These structures are prevalent in venture capital type transactions particularly in the Internet, telecommunications and technology sectors which have and are still generally off-limits to foreign investors. A registration as required under Circular 75 is a must have in almost all venture capital deals which target a future listing. Fast forward to today, the issuance of Circular 37 to replace Circular 75 is therefore seen as a significant regulatory development in this space and its implications need to be considered carefully by the investment community and advisors alike. We set out in this note the key differences between Circular 37 and Circular 75.

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