Shanghai recently formulated interim measures on investment risk compensation to encourage entrepreneurship among the public and attract investment among technology startups.

The measures are known as the "Interim Measures for Administration of Angel Investment Risk Compensation" and came into force on Feb 1. They were drafted by the Shanghai Science and Technology Commission, Shanghai Municipal Finance Bureau and Shanghai Municipal Development and Reform Commission.

Based on the measures, special funds will be allocated by the Shanghai municipal government to provide investment institutions with risk compensation worth up to 60 percent of the possible loss on investment made in seed-stage tech startups and up to 30 percent of losses on investment in early-stage tech startups. The maximum compensation on a single project will be capped at 3 million yuan ($464,576). Each investment institution can apply for up to 6 million yuan in compensation.

Authorities from the Shanghai Science and Technology Commission explained that the measures aim to encourage more investment on high-risk projects and pave the way for Shanghai to become a global scientific and technological innovation center.

The authorities will audit the risk compensation and daily management funds to ensure their safe and standard usage. Any falsification or cheating will be subject to punishment and the recovery of funds.

The measures define subjects of risk compensation as investment institutions that invest in Shanghai’s seed-stage and early-stage tech startups.

According to the Ministry of Industry and Technology Information’s standards for small enterprises, seed-stage startups refer to companies founded within three years possessing no more than 50 employees and whose assets do not exceed 5 million yuan. 

Early-stage startups are defined as having no more than 200 staff and combined assets and annual sales volume less than 20 million yuan. 

Tech companies are defined according to Shanghai's standard on technological enterprises.