The Chinese company, backed by state-owned Shanghai Electric Group Corp and venture firm Sequoia Capital China, is targeting a valuation of about 10-11 billion yuan ($1.49-1.64 billion) prior to the funding round, said two of the people.

The third person said Leap Motor is aiming for a valuation of $2 billion, and plans to formally launch the fundraising next month and close it in the third quarter of the year.

The proceeds will be mainly used to finance the mass production of its first electric vehicle (EV), Leap Motor S01, and research and development, one of the sources said.

Deutsche Bank and Chinese brokerage Huatai United Securities are advising the fundraising as Leap Motor looks to attract both foreign and domestic investors, the people said, declining to be named as the information is confidential.

Leap Motor and Huatai United did not immediately respond to requests for comment. Deutsche declined to comment.

The fundraising comes as China this week raised its standards for new energy vehicles (NEVs) that qualify for subsidies and cut the amount it is willing to provide to battery electric cars.

The country rolled out a generous 5-year subsidy programme for the NEV sector in 2016, but it has been slowly rolling the programme back and plans to phase out subsidies after 2020 amid criticism that some firms have become too reliant on the funds.

While overall auto sales in China fell last year for the first time since the 1990s, its NEV market has continued to grow. NEV annual sales hit 1.26 million vehicles in 2018, up 61.7 percent from 2017, according to official data.

Leap Motor was founded in 2015 in Hangzhou, China's Southeastern Zhejiang province, by surveillance devices maker Zhejiang Dahua Technology Co and its founders.

It currently makes only one car model, priced at up to 149,900 yuan apiece post-subsidies, targeting the middle- and lower-end mass market like its peers such as WM Motors.

Bigger EV makers such as Nio Inc and Byton see themselves more as China's challenger to Tesla Inc, mainly producing more expensive and high-end cars.

Leap Motor started selling the S01 in January and will start delivery in the second quarter, its website shows. Vice president Zhao Gang in the same month told local media that it planned to sell 10,000 S01 EVs within the year.

This week, it released the design of a new SUV model that will be showcased in the Shanghai Auto Fair next month. It did not disclose when the SUV will roll into market.

($1 = 6.7233 Chinese yuan)

(Reporting by Julie Zhu and Kane Wu; Editing by Himani Sarkar)

By Julie Zhu and Kane Wu