Is VIE structure illegal in China?

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Is VIE structure illegal in China?

The VIE structure is illegal under Chinese law The contracts pertaining to control of the assets and the rights to the profits are legally unenforceable. The reason is that any right of the VIE to profits of the Chinese company rest on the contracts it has with the real Chinese company.

What is a VIE structure China?

Typical China-Based VIE Structure Technically, the VIE refers only to a Chinese entity owned by Chinese individuals or entities without foreign investment or foreign equity ownership (the operating company). Typically, the control company is established by the founders of the operating company.

How does a VIE structure work?

VIEs are set up with a unique structure where investors do not have a direct ownership stake in the entity but rather have special contracts, which specifies rules and a percentage of profits. Therefore, in a VIE, the investor does not participate in residual profits or losses that usually come with ownership.

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What is VIE listing?

► A structure to allow an overseas listing of PRC businesses in certain industries, subject to. restrictions on foreign investment under PRC law (restricted businesses) (e.g. internet content provision, media, telecom).

Is the VIE structure risky?

VIE was recognized by GAAP accounting standards, and Moody’s assessed VIE default risk as low in 2014. In 2017, the Council of Institutional Investors (CII) sternly warned of this risk and called on the SEC to strengthen disclosure guidance.

Is Alibaba VIE structure?

Alibaba is one of the companies using the VIE structure. The fact that Alibaba is a VIE creates risks that investors need to keep in mind, but I remain bullish on the stock.

Is Alibaba a VIE structure?

Alibaba as an example For example, Alibaba, the largest retailer and e-commerce company in China, uses a VIE structure allowing U.S. investors to purchase VIE shares in Alibaba on the New York Stock Exchange (NYSE).

Is BABA ADR a VIE?

The company’s status as a Variable Interest Entity (VIE). When you buy stock in BABA, you technically don’t own shares in Alibaba Group itself, but in an offshore shell company that has a claim to its profits.

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Will China close VIE?

On Tuesday, Bloomberg, citing anonymous sources, reported that Beijing will ban Chinese firms from establishing offshore corporate structures known as “variable interest entities” (VIEs), thereby eliminating a legal workaround that has enabled Chinese companies like Alibaba Group Holding, Tencent Holdings, and Didi …

How do you determine if an entity is a VIE?

If the equity holders lack any of the following indicators of financial control, the entity is a VIE:

  1. Power to direct the activities of the entity that most significantly impact the entity’s economic performance.
  2. Obligation to absorb expected losses.
  3. Right to receive expected residual returns.

Is Didi a VIE?

Chinese tech giants including Alibaba, Baidu, and Didi have listed in the U.S. through so-called variable interest entity (VIE) structures which provide a work-around for Beijing’s strict prohibition on foreign investment in areas of the economy it deems sensitive to national security, like the internet.

What is the history of the VIE structure in China?

However, the history of the VIE Structure in China did not start in 2000. In fact, a predecessor to the VIE Structure, commonly known as the Unicom or China-China-Foreign Model (“ CCF Model ”) was being used as early as the mid-1990s. Unicom is a Chinese telecommunications company that was established in 1994 to be a competitor of China Telecom.

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Can a vie be used in China?

overseas. It is also not used with private companies listed on Chinese stock exchanges. While the VIE structure is most common on the NYSE and NASDAQ, it can also be found in companies listed on other foreign exchanges, including Hong Kong and Toronto. Because the VIE is an American accounting term, entities controlled through

How is the typical VIE structure set up?

The typical VIE structure is set up as illustrated in the following diagram: As indicated in the diagram above, foreign investors and PRC individuals establish SPV1 in Cayman; then SPV1 sets up a wholly-owned SPV2 in Hong Kong; and then SPV2 establishes the wholly foreign-owned enterprise (” WFOE “) in the PRC.

What is the best listing structure for a Chinese company?

For the red-chip listing, there are two commonly-used structures for Chinese companies: the straight-forward offshore listing structure and the VIE structure.