Culture Industry Investment Risks

11 September 2012

China’s culture and entertainment industries have developed rapidly in recent years. Adopted at the 17 sessions of six Chinese Communist Party plenary conferences on October 18, 2011, the Decision on Major Issues about the Central Committee of the CCP Deepening the Reform of the Culture System and Promoting Development and Prosperity of Socialist Culture has again put forth the idea of “promoting the culture industry to become a pillar of the national economy.” We believe that under the active guidance of the national policy, the culture industry will have great investment value in the future. Compared with investments in more traditional industries, investments in the culture industry require investors to pay attention to specific changes in regulations and legal risks.

First, it will be expected that the laws and regulations related to the culture industry will undergo substantial change with the promotion of the national policy. In our opinion, these are mainly embodied by several goals of the new national policy:

1) Reduce the access threshold and attract civil and foreign capital to enter into those culture industry areas that are allowed by policy;

2) Give preferential taxes and strengthen tax support;

3) Increase government investment and financial support in the culture industry.

All of the above circumstances indicate that investors need to be very aware of the relevant policy changes when they invest in the culture industry.

Secondly, culture and entertainment companies generally have very few fixed assets but lots of intellectual property. Therefore, valuation risks are inevitable, which is mainly due to a lack of a relatively accurate evaluation system with which to assess the value of intangible assets. We have also noted that many culture and entertainment companies lack the knowledge necessary to protect their intellectual property, which often carries the potential risk of infringement or alleged infringement of intellectual property rights. For all these reasons, we suggest that investors seek professional intellectual property lawyers to perform due diligence about the intellectual property rights related to prospective investment projects in order to know various risks related to IP rights and to avoid large missteps resulting from misjudgment in investment valuation. During this process, the investors need to pay specific attention to the right type, the scope of rights, the burden of rights and the time limit of the rights of the intangible assets.

We have also noted that currently there is enormous variation in terms of quality among culture and entertainment enterprises in the market, and most of them do not pay great attention to standards for company construction and operation. Some companies are established solely to run one or a few projects, and once the project is completed, the corporation possibly also dissolves. Some companies even exaggerate any particular advantage they may have to attract investors, such as their acquisition of funds from policy support, preferential taxes and so on. Regarding the above-mentioned circumstances, it is better for lawyers to be involved in the projects as early as possible. With lawyers’ help, investors can carefully screen investment targets and carry out a complete investigation in order to obtain a comprehensive understanding of the validity and authenticity of the investment target to the greatest extent possible. Lawyers can also provide suggestions about the concrete investment mode, investment cycle, and withdrawal channels in order to help investors ascertain the best investment plan.

We certainly understand that the culture industry covers a wide range of businesses, such as the film and television drama industry, the internet and other emerging media industries, digital publication, cable TV operation and so on, all of which have their own characteristics and different applicable laws and regulations. Investors should do a careful analysis when facing different risks according to the specific circumstances of different fields and projects.

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