Chinese securities regulators say some Chinese fund managers may be violating financial industry rules by selling to retail investors small slices of private funds linked to stock market listing projects and other relatively risky fundraisers, reported Chinese news agency Caixin.

The Shanghai branch of the China Securities Regulatory Commission (CSRC) fired the first shot on March 25 when it fined Shanghai Zhelin Equity Investment 30,000 yuan for selling an interest in a private equity fund to a retail client. The client’s 300,000-yuan investment for a share of private financing project fell short of the 1 million yuan legal minimum for a single investment in such projects.

At the time, CSRC spokesman Deng Ke told reporters such practices violate private fundraising rules, said Caixin. Such products are only supposed to be sold to wealthy individuals and institutional investors with strong risk controls.

An investor looks at an electronic screen showing stock information at a brokerage house in Nanjing, Jiangsu Province, China, May 9, 2016. China Daily/via REUTERS
An investor looks at an electronic screen showing stock information at a brokerage house in Nanjing, Jiangsu Province, China, May 9, 2016. China Daily/via REUTERS

Chen Ziqiang, director of CSRC’s Private Equity Funds Supervision Department, told reporters April 29 that problems inside the private fundraising industry have grown in recent years, reported Caixin. A top concern is that firms are offering retail investors products tied to sell private funds without fully divulging risk issues. And some firms are distributing inaccurate information, he said.

CSRC saw the potential for problems two years ago when it set the 1 million yuan threshold for a single investment in a private fundraising project, according to Caixin. It also declared that a single project cannot have more than 200 investors, and that an individual investor must have more than 3 million yuan in assets or have earned more than 500,000 yuan annually during the previous three years.

Afterward, complaints about financial service firms started piling up at the Asset Management Association of China (AMAC), reported Caixin. Between May 2015 and last April, the association received 765 complaints and reports about irregular fundraisers that were said to have posed too much risk for retail investors – a number equal to 94% of all complaints filed with AMAC. Target projects included private equity investments, securities investment funds and venture capital products.

Sources close to CSRC said the regulator has been monitoring the situation and collecting data with the goal of strengthening risk controls for retail investors.

CSRC recently announced a new set of restrictions that will take effect July 15. They are aimed at preventing fund managers from splitting private fundraiser quotas into retail investor-sized pieces.

Regulators are particularly taking aim at online platforms run by financial service companies that qualify as institutional investors, legally acquire investment quotas tied to private funds, and then sell quota pieces to retail investors through Internet-accessible wealth management products.

It’s not necessarily a situation where retail investors are being duped by financial services firms into these products, but rather retail investors seeking and demanding higher yielding investments in a tough investment climate.

China’s retail investors are wealthier than ever, and they’re clamoring for moneymaking targets, Hong Lei, the chairman of the AMAC told Caixin.

“The society’s wealth is surging but high-quality assets are scarce,” Hong said. Thus, in hopes of high returns, “an increasing number of retail investors are being lured into the private fundraising market.”

Bao Fan, chairman of the investment bank China Renaissance told Caixin. He added that retail investors can’t control risks as well as institutional investors. And because small investors lack full access to company and market information, they may be defrauded.
“Retail investors do not have risk pricing power,” Bao said. “Primary market information disclosure requirements are lighter than those in the secondary market.”

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