In a move that could impact the use of Virgin Islands structures, China’s government recently issued new guidelines aimed at increasing the supervision of some of the largest Chinese companies listed on foreign
stock exchanges.
The new measures will amend the rules for overseas stock offerings and increase application of China’s Securities Law for companies already listed abroad, the Chinese Cabinet said in July.
This may hamper United States initial public offerings by Chinese companies and affect VI business, according to experts.
VIE structures
Chinese companies use structures called variable interest entities to allow foreigners to invest in key industries, such as ecommerce, that are regulated by the Chinese government.
“In the last decade, VIE structures have become increasingly popular in the People’s Republic of China as a mechanism to allow foreign investments into China,” wrote Vicky Lord, a Shanghai-based Harneys managing partner, and her colleagues in a white paper issued jointly last year with Chinese firm Fangda Partners.
They explained that the VIEs enable investors to exercise control through contractual arrangements rather than majority voting rights.
VIE structures typically follow a multi-step process in which the owner first incorporates a company in the VI, which then incorporates another company in the Cayman Islands, which then can potentially be listed on stock exchanges in the US or China, according to the paper.
The owners then maintain control from China, while the Cayman company issues shares to foreign investors.
According to the US-China Economic and Security Review Commission, nearly 250 Chinese companies are listed in New York with a combined
market capitalisation of $2.1 trillion. At least four of the Chinese companies listed on US exchanges as of this week listed the
VI as their place of incorporation, according to US-based research firm Stock Market MBA.
Twenty-three listed their place of incorporation as the Cayman Islands, including Chinese internet giant Alibaba, which raised $25 billion with its
initial public offering in 2014, according to Reuters.
Increased scrutiny
This year, 34 Chinese companies raised $12.5 billion from listing in the US, according to data from Refinitiv, a US-British financial data firm, and in April the New York Stock Exchange estimated another 60 Chinese companies were planning to go public this year.
However, some experts speculated that future IPOs could be made more challenging due to the increased scrutiny.
The effects have already been felt. In July, Chinese medical data group LinkDoc Technology Limited became the first company to scuttle plans for an IPO in the US due to the clampdown, Reuters reported. The move could be part of China’s further reining in of its tech industry, wrote Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics, on the Nikkei Asia website.
“In the area of Big Tech, China’s recent measures are more of a correction than an overreach, though there is no denying that these regulations are designed in part to expand party control as well,” he wrote.