Simon Says: How not to lose money when investing in China

Published
03/02/2017 by

This is the first in a weekly series of legal advice provided in a short and entertaining story format.

 

This week's areas of Interest: Contract Law, Investment Law

 

This week's keywords: Corporate, Finance, Private Eqity Fund, Guaranteed Return

 

ALEX WANTS A NEW CAR: A story of "guaranteed returns"

Watch this introductory video first and/or read the complete story below before seeing what "Simon Says"


 

Alex wanted a new car. He had dreamt of getting 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 that amount.

 

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 Alex to buy. 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.

 

Alex immediately put all his savings 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 Alex even get his capital back?

 

Prof Simon Says:


Yes, Alex can have his capital, plus his 4% interest back.

 

Normally, for any private equity fund with a minimum yield, the lowest amount of investment is 1 million. Therefore, this is not considered as a private equity in legal terms, as Alex only invested 50,000. 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 is in breach of the securities 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.  

 

For more about this or to contact Professor Simon Choi at www.acmeardent.com, simonhkchoi@163.com, +86 13823677853 or by WeChat: simonhkchoi. 

 

ACME Ardent's Simon Choi WeChat QR Code

 

"This article was originally written in Chinese by Mr Huanyu Li and rewritten into English by Acme Ardent Legal Studio."

 

Simon Choi

About the Author: Professor Simon Choi

Prof Simon Choi, solicitor and linguist, is an international lawyer, qualified to practise law in England & Wales and in Hong Kong, China. Simon graduated from law schools of the Peking University, the University of London and the University of Hong Kong respectively, with an in depth knowledge of Chinese laws and common laws and with more than 20 year experience in China practice and international trade, investment, finance, merger & acquisition. He is an adjunct professor of laws at the Zhongnan University of Economics and Law. Simon is the founding partner of Acme Ardent and can be reached at simonhkchoi@163.com or +86 13823677853.

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