Summary of Key Points
The new private equity regulations issued by the State Council (Document No. [2026] 54 from the General Office of the State Council) represent the "top-level design" for the private equity sector, with the core logic being to "support the good and restrict the bad." On one hand, measures are taken to restrict the less desirable entities by tightening access requirements, clearing out violations, and strengthening supervision (for example, new county-level funds are restricted from being established, shell managers are deregistered, and proxy holding arrangements are restructured). On the other hand, policies are designed to favor compliant venture capital (VC) funds that invest in early-stage, small-scale projects, and high-tech companies. The regulations cover the entire process from establishment to exit, and a three-year action plan with detailed implementation guidelines will follow. Practitioners must proactively comply with these new requirements.
Detailed Interpretation
1. County and District Government Funds: New Establishment Nearly Impossible, Existing Funds Must Be Consolidated
In the past, many county and district governments rushed to establish funds, leading to severe homogenization, scattered capital, and difficulties in withdrawing investments. The new regulations have a significant impact on these funds:
- New Establishment Restrictions: In principle, county and district governments are no longer allowed to create new government-funded funds; if necessary, approval from higher-level authorities (such as city or provincial governments) is required. Funds that are already in the planning stage must undergo additional review, and those intending to establish new ones must prove that there are no similar funds in the area.
- Existing Fund Consolidation: Provincial governments are responsible for managing similar funds. Existing funds of the same type cannot be established again, and efforts will be made to merge or coordinate existing funds (for example, combining several county-level funds targeting the same sector).
Impact: It will become harder for counties and districts to compete for projects through these funds, and existing funds may need to be consolidated. Fund managers (GPs) should prepare for potential mergers in advance.
2. Want to Enter the Private Equity Industry? First, Pass the Review Process
Previously, establishing a private equity firm involved registering a company and then filing for registration. Now, an additional pre-review step has been added:
- Pre-review Requirement: Approval from comprehensive assessment meetings conducted by the securities regulatory authorities and provincial financial departments is required (for example, to verify the presence of a qualified team and the compliance of funding sources). Only after passing this review can a company with the name "private equity fund" be registered. The review standards are set uniformly by the Securities Regulatory Commission and cannot be delegated to lower-level authorities.
- Clearing Out "Pseudo-Private Equity" Firms: Companies that use the term "private equity fund" in their names but have not completed the registration process must either complete the registration or change their name/business scope; otherwise, they will be labeled as unregistered and may have their licenses revoked.
Impact: It has become more difficult to start a new private equity firm, and the possibility of using a shell company to operate as a private equity entity has been eliminated. Companies that are already registered but not registered must make immediate corrections.
3. Uniform Rules for Performance-Based Agreements
Performance-based agreements (such as founders repurchasing shares if the company fails to meet targets) are common in private equity investments, but previous court rulings varied from region to region. The new regulations aim to establish standardized rules for these agreements:
- Clear Guidelines: There will be unified standards for the validity of performance-based agreements, how repurchases are executed, and how profit compensation is calculated.
Note: Although the specific details have not yet been released, GPs and founders should be cautious when signing such agreements, as they may need to adjust them in the future.
Impact: This will reduce post-investment disputes, providing clarity for both GPs and founders.
4. Tightening of Compliance Standards
The new regulations impose stricter penalties on non-compliant practices:
- Off-site Operations: Private equity firms registered in tax-friendly areas (such as industrial parks) but with teams based in larger cities like Beijing, Shanghai, or Shenzhen will face stricter supervision (including more frequent inspections). It is recommended to align the registration location with the actual business operations.
- Proxy Holding/Channel Arrangements: Firms that use other entities to issue products or charge management fees through intermediaries must make necessary corrections (for example, returning equity or terminating channel agreements); otherwise, they will face regulatory action.
- Shell Managers: Private equity firms without actual business activities or those that have been out of contact for a long time will be deregistered within a specified period. Those that do not deregister on their own will have their names replaced with a unified credit code by the regulatory authorities, and some may even have their licenses revoked (over 7,400 firms were deregistered between 2022 and 2025; this time, the enforcement is expected to be even stricter).
- Whistleblower System: There is a formal mechanism for internal whistleblowers to report violations, and whistleblower information will be protected, making it easier to expose non-compliant firms.
Impact: The cost of non-compliance increases, and private equity firms must self-examine their practices: Are fund-raising activities standardized? Have related-party transactions been disclosed? Are investors qualified?
5. Positive Developments for Venture Capital Funds
The new regulations include a few positive incentives:
- Priority Support: VC funds that invest in early-stage, small-scale projects, and high-tech companies (such as those in chip or AI) will receive priority in the registration and fundraising processes.
- Broadening of Funding Sources: Policies encourage the participation of "patient capital" (e.g., social security funds and insurance institutions) in VC investments, and exit channels (such as IPOs and mergers and acquisitions) will be improved.
Impact: GPs focusing on early-stage high-tech investment will have a more favorable policy environment, making fundraising and exits smoother, although compliance requirements must still be met.
Recommendations for Practitioners
The new regulations serve as a guide, with detailed rules to follow. The key approach is to proactively comply with the new standards. Conducting self-examinations and making necessary corrections now will result in lower costs compared to facing penalties later on. For VC funds, seizing the opportunity to invest in early-stage, small-scale projects, and high-tech companies will be supported by the policy.
In summary, the private equity industry is transitioning from a period of rapid growth to one of higher-quality development. Compliance is essential, and professionalism is key.
(Note: The above analysis is based on the original news article; the actual implementation will be subject to the official guidelines.)