Bloomberg News quoted news that as part of strengthening network data security control, the China Securities Regulatory Commission is drafting new regulations and will solicit public comments as soon as this month. The news stated that companies using the VIE structure can still conduct IPOs in Hong Kong, but require approval.
According to the news, companies that are currently listed in the United States and Hong Kong using the VIE structure will need to make adjustments to make their shareholding structure more transparent, especially for companies in areas where foreign investment restrictions exist in China. It is not clear whether this move means that the shareholding structure of these companies will be completely changed, or some sensitive companies will be delisted.
Based on VIE and agreement control to achieve overseas listing, it is very common in Chinese technology and new economy enterprises. Alibaba（9988）Tencent（0700）, ByteDance, and China concept stock companies that may be listed in the future will be affected by the new regulations.
According to the news, the regulator has notified some investment banks to suspend the listing counseling arrangements for VIE-structured companies.
People familiar with the matter said that the details of the new regulations are still being discussed and there are still variables. China Securities Regulatory Commission did not respond to Bloomberg’s inquiry.
China’s current State Council’s special regulations on overseas stock offerings and listings of joint stock limited companies issued in 1994 require domestic companies to apply for approval to the securities authorities of the State Council when they raise shares from overseas investors and list overseas.
This provision does not make clear provisions on the overseas listing of overseas entities that hold shares or control domestic business. Therefore, a large number of Chinese concept companies are able to issue shares through registered offshore entities in the Cayman Islands and other places. Offshore entities use shareholding or agreement control (the so-called VIE structure) to bypass the approval procedures of the China Securities Regulatory Commission to achieve overseas listing of domestic businesses.
Such companies listed through offshore entities are usually referred to as Chinese concept stocks or red chip companies.Among them, companies with a background in state-owned assets are called “big red chips”, such as China Mobile（0941）The overseas listing of such a company has been subject to supervision, but there are still regulatory gaps in the overseas listing of non-state-owned “small red chips” such as Didi.
Sina successfully landed in the U.S. capital market through a VIE structure formed through a series of control and profit distribution agreements many years ago. Since then, almost all overseas listed Chinese Internet companies have adopted this model. However, the VIE structure has not been officially endorsed by the Chinese government, and there are gray areas in the regulatory and legal fields.
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