Regulating Private Placements in China: A Principled Approach

Abstract

As China’s economy continues to grow and mature, the market for private placements will also grow. Economic prosperity will result in a greater number of investors seeking investment opportunities. Prosperity will also result in the greater demand for goods and services, fueling the creation of more businesses that require capital. As China confronts this market reality, it must decide its legal response to the private-placement market. China is still in the early stages of deciding what sort of legal regime should govern its private-placement market. As it stands now, private placements in China are effectively governed by one provision in the Securities Law of the People’s Republic of China. This article explores what approach China should take in regulating its private placements. In the end, this article can provide no ultimate truths as to whether China should approach securities regulations with a heavy hand or a light one. The author recommends erring on the side of less regulation, rather than more. Whether that path is the correct one for China requires more reflection and consideration by Chinese policy-makers. For any approach Chinese policy-makers adopt to regulate private placements, they should adhere to certain principles: First, private-placement laws and interpretations must be based on a careful understanding and balancing of the costs and benefits of the proposed regulation. Second, private-placement laws must be drafted clearly and made easily accessible to the public to reduce compliance costs. Third, interpretations of laws must be intellectually legitimate – they must logically follow from the language and purpose of the law.