By Zeng Xianwu Bai Lihui King & Wood’s Foreign Direct Investment (FDI) Group
To achieve the initial public offering (“IPO“), there are two options for Chinese companies, onshore listing (also known as A-share listing) and offshore listing (also known as red-chip listing). Since the conditions and qualifications for A-share listing are usually a little higher and the procedure is more time-consuming than for the offshore listing, Chinese companies which cannot meet the A-share listing’s requirements or which need to complete IPO rapidly, usually would prefer the red-chip listing. For the red-chip listing, there are two commonly-used structures for Chinese companies: the straight-forward offshore listing structure and the VIE structure. In addition, for the purpose of attracting foreign investors and for circumventing restrictions on foreign direct investment, during the Pre-IPO restructuring, the VIE structure is also widely used by Chinese companies and foreign companies alike.
In 2011, after a series of public events, the variable interest entity (“VIE“) structure re-attracted a lot of attention and concerns from the PRC authorities, entrepreneurs, investors and other market participants. This essay will describe the circumstances in which the VIE structure was created, how it has been used and the changes in the regulatory environment which might affect the feasibility of utilizing the VIE structure.
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