Aladdin wanted a new car. He had dreamed of owning a sports car since he was young, and he never thought a Toyota Camry could fit into that category. He wanted an upgrade, and a GTR was his dream car. However, he was rather in short of the amount of cash needed.
Bonds and mutual funds did not interest him, as the low interest of 3% was not enough. He wanted to roll the money into a bigger sum.
Knowing exactly what he wanted, the salesperson recommended a Private Equity Fund to enable Aladdin to buy the car. The fund management company was about to launch a new project and projected a 15% rate of return for his money. They even guaranteed a minimum yield of 4% plus his capital back in case the project failed.
Aladdin immediately put all his savings of 500,000 RMB into the project, thinking it was impossible for him to lose money.
One year later, according to Alex’s calculations, he would have enough money to get his GTR, so he ordered the fund management company to pay him back.
Devastating news awaited him. The company had failed in making a profit and even lost half of his capital in the process. ‘High risk, high return mate! Do you really think that money grows on trees?’ was the answer he got.
So can Aladdin even get his capital back?
Law In A Minute
Yes, Alex can have his capital back, plus his 4% interest back.
Normally, for private placements with a minimum yield, the lowest amount of investment is 1 million. Therefore, this is not considered as a private placement in legal terms, as Alex only invested 500,000. It is considered as private lending in court, as the debtor is obliged to pay the capital plus interest to the creditor.
Moreover, the fund management company also broke the law by guaranteeing Alex’s capital and a minimum yield. There is no high return, low-risk product in the world. The company may only back their statement with evidence in order to persuade Alex to buy their product, but not guarantee him his capital.
Legal Basis
Securities Investment Fund Law of the People’s Republic of China – Article 103
A fund investment adviser and its employees shall provide fund investment advice services on a rational basis and make truthful statements on its serviceability and business performance and shall not promise or guarantee investment returns in any form or infringe upon the lawful rights and interests of the clients.
Interim Measures for the Supervision and Administration of Privately Offered Investment Funds – Article 12
A qualified investor of a private fund shall be an entity or individual that has the corresponding risk identification ability and risk tolerance, invests not less than 1 million yuan in a single private fund, and meeting the following relevant criteria:
(1) An entity with net assets of not less than 10 million yuan.
(2) An individual with financial assets of not less than 3 million yuan or with average annual income in the last three years of not less than 500,000 yuan.
The term “financial assets” as mentioned in the preceding paragraph includes but is not limited to bank deposits, stocks, bonds, fund shares, asset management plans, financial products of banks, trust plans, insurance products, and futures equity.
Article 15
A private fund manager or distributor may not promise any principal guarantee or minimum return to investors.
Edgar Choi is author of “Commercial Law in a Minute” and host of a legal-advice account “Law in a minute” on WeChat
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