[ad_1]
What is a VIE? The structure uses two entities. The first is a shell company based somewhere outside of China, usually in the Cayman Islands. The second is a Chinese company that holds the necessary licenses to do business in the country. The two entities are linked by a series of contracts.
When foreign investors buy shares of a company that uses a VIE, they buy shares of the foreign shell company, not the company in China.
Didi Global does not own the business in China that connects drivers to drivers. But it has contracts in place which entitle its shareholders to the economic benefits produced by this company.
The bottom line: When Americans launch their trading app and buy Didi shares, they don’t get a direct stake in Chinese society. This arrangement is explained in Didi’s prospectus, but not everyone is aware of it. Alibaba, Pinduoduo, and JD.com also use VIEs, to name a few.
Why use a VIE?
Chinese companies have used this structure for decades because foreign investors are not really allowed to own stakes in local companies in sectors such as technology. Yet Chinese companies want to raise funds abroad.
Creating an offshore holding company that goes public helps Chinese companies to circumvent these rules. Wall Street and US regulators have long been on board with the deal, giving US investors easy exposure to the dynamic companies that power the world’s second-largest economy.
But there are huge risks. First, it is not clear that the contracts that give foreign investors the right to the economic benefits produced by Chinese companies are enforceable. It is also not clear whether VIEs are legal under Chinese law.
Here is what Didi says about the arrangement: Didi says in his prospectus that his legal counsel considers that his VIE “does not violate the mandatory provisions of the applicable PRC [Chinese] laws “and that its contracts are” valid and binding “.
But it also included a warning to potential investors.
“We have further been informed by our PRC legal advisor that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations,” Didi warned. “The PRC government may ultimately take a stand contrary to the opinion of our PRC legal adviser.”
Think of the problem this way: Chinese companies are basically telling Beijing that they are 100% owned by Chinese citizens. Meanwhile, the same companies tell foreign shareholders that they are the real owners.
After decades of taking a relaxed approach by Chinese and US regulators, there are signs that both are becoming uncomfortable with VIEs.
“I am concerned that average investors may not realize that they own shares in a shell company rather than a China-based operating company,” he said.
One of the new SEC provisions will require Chinese companies to disclose “whether the operating company and the issuer, if any, have received or have been denied permission from Chinese authorities to register. on the American stock exchanges “.
This provision seems to target Didi. Just days after its massive IPO, Chinese regulators targeted the company with a cybersecurity probe after it allegedly pursued listing over Beijing’s objections.
“I believe these changes will improve the overall quality of disclosure in the registration statements of offshore issuers that have affiliations with operating companies based in China,” Gensler said.
China is also taking a closer look at foreign quotes. China’s powerful cyberspace administration proposed in July that any company with data on more than a million users seek the agency’s approval before listing its shares overseas.
Investors, beware.
Biden’s EV sales target won’t be too hard to hit
President Joe Biden announced a deal last week to push the U.S. auto industry to sell more electric vehicles. The goals include a “shared aspiration” that 40 to 50% of vehicles sold in the United States will be electric, plug-in hybrids or hydrogen.
Sales of battery-powered vehicles, including all-electric and plug-in hybrids, are expected to account for just 4.3% of all vehicles sold in the United States this year, according to IHS Markit.
“No one really wants to be seen as the dodger or the dinosaur, the one fighting this progress,” she said.
next
Friday: Consumer sentiment at the University of Michigan
[ad_2]
Source link