Laws of the People's Republic of China

Several Directing Opinions of the Ministry of Finance and the State Development and Reform Commission on Experimenting the Use of Industrial Technology Research and Development Funds as Venture Capital

Cai Jian [2007] No. 8

The public finance departments (bureaus) as well as the development and reform commissions of each province, autonomous region, municipality directly under the Central Government, and city specifically designated in the state plan:

In order to implement the scientific development view, construct an innovative country, support the development of commonweal industries and national strategic industries, as well as promote the rapid and healthy development of the venture capital undertaking in China, the Ministry of Finance and the State Development and Reform Commission, according to the Law of the People's Republic of China Concerning the Promotion of the Transformation of Scientific and Technological Achievements, Some Opinions of the Ministry of Finance and the Ministry of Science and Technology Forwarded by the General Office of the State Council on Improving and Reinforcing the Administration of Scientific and Technological Funds Allotted by the Treasury of the Central Government (Guo Ban Fa [2006] No. 56), other related laws and regulations, as well as the tenets of other documents,, have decided to use partial funds for research and development of national industrial technologies as venture capital. The following opinions concerning related issues are hereby given:

I.

Principles for Venture Capital

(I)

Market-oriented operations. We shall face the market and give full play to the directing function of government funds so as to fully drive public capitals to invest in hi-tech industries; the venture capital project shall be conducted on the basis of market, that is, to independently operate the business and solely assume responsibility for its profits or losses; the government departments may not interfere in the project undertaker's operation, while the management institutions shall, upon authorization by the government, exercise investors' rights and bear corresponding liabilities on the basis of the investment amount.

(II)

Encouraging innovations. In experimenting the venture capital among industrial technology research and development funds, they shall be mainly invested into commonweal or public projects of scientific and technological research and development as well as achievement transformation thereof at the seed or start-up stage in hi-tech industries. Such projects, which are characterized by original innovations, integrative innovations or digestible and absorbable re-innovations, differs from general commercial risk capital projects and do not aim at the maximization of benefits are.

(III)

Focusing on guidance. The purposes of experimenting venture capital among industrial technology research and development funds are to direct public capital to invest in hi-tech industries, to settle the short of funds in hi-tech industries at the seed or start-up stage, and to mobilize the project undertakers' initiative, and apportion risks on the condition that the venture capital may not occupy majority shares or exercise the dominant management.

(IV)

Normative Management. A normative consecutive project selection mechanism shall be established. We shall, through various methods, reinforce the capability cultivation of management institutions, to strength the responsibilities thereof, and establish an effective risk prevention system and incentive mechanism. The funds shall, in accordance with public finance principles, be withdrawn from the venture capital in time when it becomes mature, and the recovered funds shall be turned over to the treasury of the Central Government.

II.

Entrusted Management Institutions for Venture Capital

(I)

Determination of Entrusted Management Institutions for Venture Capital.

A professional management institution shall be entrusted to manage venture capital, and the Ministry of Finance shall, by way of invitation to bid, determine the professional management institutions jointly with the State Development and Reform Commission, and enter into entrustment agreements with such professional management institutions.

(II)

Qualifications of entrusted management institutions:

1.

to possess the status of an enterprise legal person;

2.

to possess registered capital of no less than 100 million Yuan;

3.

to have been engaged in venture capital management for more than 5 years;

4.

to have at least 5 practitioners with 3-year or more work experience in venture capital business;

5.

to have sound venture capital management system; and

6.

to have successful experiences in operating venture capital projects.

(III)

Duties of an entrusted management institution:

1.

recommending investment projects as required by these Opinions and other related provisions;

2.

exercising investor's rights to the invested enterprise upon entrustment within the limit of the investment amount, including appointing directors and supervisors thereto, and lawfully exercising rights via the shareholders' meeting, the board of directors, and the board of supervisors;

3.

providing the invested enterprise with various value-added services by making full use of its own resources and its experiences in the venture capital business, assisting the enterprise to establish lawful management system, and promoting the development of the enterprise;

4.

regularly reporting the project progress, stock capital changes and other major issues of the invested enterprise to the Ministry of Finance and the State Development and Reform Commission; and

5.

organizing the withdrawal of venture capital as required, and turning over the recovered funds to the treasury of the Central Government in a timely manner.

III.

Selection of Venture Capital Projects

(I)

A venture capital project shall satisfy the conditions as follows:

1.

It possesses the nature of technology for commonweal and public interests, and may obviously enhance the independent industrial innovation capacity and the enterprise's core competitive strength;

2.

It possesses independent intellectual properties with high technical contents; and

3.

In case it is weak recently to raise funds, it has promising market prospects and a strong anticipated profitability.

(II)

Venture capital project may be selected and determined in the two ways as follows:

1.

The State Development and Reform Commission may, according to the national economic, scientific and technological development strategies and planning, etc, promulgate the Guidance for Applying for Venture Capital Projects jointly with the Ministry of Finance. The development and reform commission at each locality may, in accordance with these Opinions, organize related projects and recommend them to the State Development and Reform Commission and the Ministry of Finance jointly with the public finance department (bureau), while the State Development and Reform Commission joint with the Ministry of Finance shall, after organizing experts to make an appraisal, decide whether to approve the investment projects and investment amounts on the basis of the conclusion of an investment agreement between each entrusted management institution and its invested entity through negotiations.

2.

The entrusted management institution may recommend investment projects. The entrusted management institution may, within the key venture capital-supported areas determined by the State Development and Reform Commission and the Ministry of Finance, evaluate and select a project it has invested in accordance with the principles and requirements as provided for in these Opinions, and report it to the State Development and Reform Commission and the Ministry of Finance. The State Development and Reform Commission shall, on the basis of the expert appraisal, decide whether to approve the investment projects and investment amounts jointly with the Ministry of Finance.

(III)

Materials to be reported for applying for a venture capital project:

1.

the project feasibility study report and the preliminary argument opinions of experts;

2.

accounting reports and credit standing materials of the project declarer in the latest two years which have been audited by intermediary institutions;

3.

the current stock right structure of the project declarer;

4.

the project declarer's resolution on consenting to the shares held in the form of fiscal investments; and

5.

other related materials.

IV.

Fund Allotment

The Ministry of Finance shall, according to relevant provisions, allot funds to the special fiduciary accounts of the entrusted management institutions on the basis of the directory and amounts of the approved investment projects, as well as the investment agreements entered into between the entrusted management institutions and their respective invested entities, and the entrusted management institutions shall then allot the said funds to their respective invested entities.

The special fiduciary account of an entrusted management institution shall be opened in an agency bank designated by the Ministry of Finance. And the Ministry of Finance, the entrusted management institution and the bank of deposit shall enter into an agreement to stipulate that the trusteeship institution may notice the bank to allot the funds only after it has received the allotment notice from the Ministry of Finance.

In case the allotment cannot be conducted continuously by virtue of any particular reason, the entrusted management institution shall recover and turn over the investment funds to the treasury of the Central Government in a timely manner.

V.

Withdrawal of Venture Capital

The withdrawal of venture capital in a project may be realized through merger or acquisition of enterprises, buy-back of stock rights and listing on the stock market, etc.

An entrusted management institution shall be responsible for observing the opportunities for the withdrawal of an investment project, and shall conduct the withdrawal when the opportunity comes. It shall also submit the withdrawal opportunity, the withdrawal method, etc. to the Ministry of Finance and the State Development and Reform Commission in a timely manner.

The withdrawn funds (containing the recovered interests and dividends) shall be directly recovered to the special fiduciary account, and be turned in to the treasury of the Central Government by the entrusted management institution in a timely manner.

VI.

Entrustment Expenses

For entrusting a management institution to manage venture capital, certain fees shall be paid. The fees consists of two parts: one part is for daily management expenditures, which shall not exceed 3% of the investment balance; and the other part is for rewarding performance, which shall not exceed a certain proportion of the total investment proceeds (net proceeds after offsetting the losses). The specific arrangements on the entrustment expenses shall be stipulated in the entrustment agreement.

VII.

Assessment and Supervision

(I)

An entrusted management institution shall, according to these Opinions and the issues agreed upon in the entrustment agreement, carefully perform corresponding management duties. And it shall formulate corresponding venture capital management systems and work flows and risk prevention systems, and shall establish corresponding work departments.

(II)

The entrusted management institutions shall be subject to the assessment and supervision of the Ministry of Finance and the State Development and Reform Commission, who have the right to check the entrusted management institutions at irregular intervals and to monitor the funds in special fiduciary accounts. Each entrusted management institution shall report its accounting reports and venture capital management reports to the Ministry of Finance and the State Development and Reform Commission at regular intervals at least once every year. The reports shall mainly contain:

1.

the entrusted management institution's assets, liabilities and owners' equities;

2.

the entrusted management institution's operation;

3.

the scale and completion of the investment contribution of venture capital;

4.

the invested enterprise's operation;

5.

the venture capital's withdrawal and proceeds; and

6.

other issues as stipulated in the entrustment agreement.

(III)

In case an entrusted management institution falls under any of the following circumstances, the Ministry of Finance and the State Development and Reform Commission are entitled to cancel or replace it, and may resort to legal means when necessary:

1.

It dose not satisfy the qualifications as provided for in these Opinions any longer;

2.

It has grossly violated any law or rule;

3.

It is revoked, dissolved or declared as bankrupt according to law; or

4.

Other circumstances stipulated in the entrustment agreement.

As regards the experiment of venture capital among industrial technology research and development funds, it is a new and helpful exploration of the way of supporting hi-tech industries with fiscal funds. However, venture capital is characterized by long investment period and high risk, so importance shall be attached to the prevention of risks so as to develop the experiment in an orderly manner in accordance with law. We shall pay attention to giving full play to the functions of the market mechanisms and the seed functions of fiscal funds so as to promote the development of the venture capital in an active and steady way.

The Ministry of Finance

The State Development and Reform Commission

January 30, 2007