Comparison of the Legal Institutions of Enterprise Financing in China and the United States by Li Youxing, Professor Guanghua Law School, Zhejiang University Paper prepared for the conference, “US-China Business Cooperation in the 21st Century: Opportunities and Challenges for Enterpreneurs,” Indiana University, Indianapolis and Bloomington, Indiana, April 15-17, 2009.As an important activity of an enterprise, financing is restricted by laws. It’s very significant to know the legal issues related to raising capital in the United States and China, including the differences between these two countries. This article will introduce and discuss the legal issues on the enterprise’s right to finance, stocks, bonds, private lending and start-up enterprises financing. 一、Enterprises’ rights to finance and the regulatory regime with respect to financing in the United States and China China adopts relatively strict regulatory regime with respect to financing. As a result, it’s regulated by the law system. Enterprise’s behavior is always regarded as “Illegal Fund-Raising” and “Illegal Securities Activities” due to their irregularities in financing. So, it will incur criminal and administrative liabilities. There are crimes of frauds in issuing stocks or bonds, such as “crime of taking deposits from the public illegally”, “crime of issuing stocks or enterprise/company bonds absent required approvals”, “crime of illegal fund raising by fraudulent means” and “crime of illegal business”. Besides, Chinese enterprises possess unequal rights to finance. The right of raising capital includes issuing an IPO and debenture openly, which must be verified and approved by the governmental regulatory bodies. Otherwise, any enterprise or individual can’t issue shares and bonds at all. However, in the United States, mechanism of registration with respect to securities issuance is well established. In the U.S., the enterprise need to register, fully and truthfully disclose information in order to finance through issuing securities. The rights to finance are automatically obtained and fairly equal. There is private placement mechanisms not involving public offering in the U.S., certain small-amount issuances are exempted from registration. All in all, the legal infrastructure is friendly to enterprise financing.二、General comparison of enterprise financing through securities China’s Securities Law (2005) does not prescribe the definition of “securities”. Securities in enterprise financing are limited to two types: stocks and corporate bonds. Investment agreements, stock certificates limited liability companies are not “securities”, and thus not regulated by Securities Law. As a result, the adjusting range of Securities Law is very limited, which only includes how to offer stocks and company bonds publicly to finance and how to trade on a stock exchange. By comparison, in the U.S., the definition “securities” under Securities Act of 1933 is broad. In that law, almost all the activities of investment and public offering stocks & company bonds to finance are adjusted. For that reason, investment agreements, even angleworms and prints are deemed “securities”. The securities laws instead of contract laws in the U.S. regulate the investment activities. Enterprise can seek financing from the public as long as they fully utilize their rights and resources, fulfill the registration requirements, and disclose the true information of the enterprise to the public. But in China, the “investment agreements” are regulated by contract laws instead of securities laws. 三、Legal mechanisms with respect to stock financing （一）Financing through public offering of stocks Public offering of stocks is an important method for Chinese enterprise to raise capital. A joint stock limited company has the right to finance by that way if it’s legally incorporated and has existed for 3 years or more continuously. However, a limited liability enterprise and other forms of business organization (like partnership) don’t have this right. For the companies limited by shares, the financial targets are as follows: Having a positive net profit of over 30 million yuan accumulatively for the latest 3 accounting years; Having a net cash flow of over 50 million yuan accumulatively, or having a business income of over 0.3 billion yuan accumulatively for the latest 3 accounting years; Having a total amount of stock capital of not less than 30 million yuan before issuance; And the proportion of its latest intangible assets(upon deduction of its land use right, right to aquatic breeding and right to mining) in its net assets not being higher than 20%. In March 31st 2009, China Securities Regulatory Commission(CSRC) distributed a new rule named《Temporal Measures for the Administration of Initial Public Offering and Listing of Stocks on Growth Enterprise Market》. It says: only a joint stock limited company which has been established by law for more than 3 years has the right of public offering and listing of stocks on the Growth Enterprise Market. And then, the company must have a positive net profit of over 10 million yuan accumulatively for the latest 2 accounting years and it’s keeping growing persistently. Or the company has a positive net profit of over 5 million yuan accumulatively for the latest 1 accounting years, the business income is over 50 million yuan accumulatively for the latest 1 accounting years, the growth rate of the business income is not less than 30% for the latest 2 accounting years, and the total amount of stock capital is not less than 30 million yuan after issuance. Certainly, an enterprise can’t issue stocks publicly without the approval of CSRC. In addition, not all the qualified companies can be approved luckily but the companies not qualified all have no chance to get the opportunity and right to raise capital by offering stocks publicly. According to the Securities Law in America, an enterprise which finances by public offering of stocks has right to do that naturally. As long as it has finished the procedures of registration according to the law and made its information available to the public. Therefore, whether the enterprise can raise funds totally depends on the choice of the investors. Moreover, there are no profit targets for an enterprise if it wants to raise capital. And then, for a Chinese enterprise