Alibaba expected to receive US approval for IPO despite federal commission warnings
Mainland internet retailer has met little resistance in Washington despite warnings from federal commission of 'major risks' posed to investors
Alibaba Group's proposal for what could be the largest initial stock offering in US history is sailing through Washington with few bumps.
While a federal commission has warned that the offering by the world's biggest internet retailer poses "major risks" for investors, the reaction from securities regulators, Congress, cabinet secretaries and competitors has been a collective shrug.
Alibaba owes its success navigating Washington's political shoals in part to a handful of key hires over the past three years. The Hangzhou-based company retained a lobbying firm headed by Ronald Reagan's last chief of staff; a former general counsel from the US Trade Representative Office; and an ex-chief of staff at the Department of the Treasury to oversee international communications and government relations.
The Securities and Exchange Commission - the principal regulatory hurdle Alibaba must clear before raising perhaps US$20 billion - has shown no sign it will reject the stock sale that could come as early as next month.
"This is going to be a watershed IPO," said Anant Sundaram, a corporate governance expert at Dartmouth's Tuck School of Business. "How come nobody at the US Trade Representative, nobody at the Department of Commerce, nobody at some congressional oversight body is saying: 'Guys, what is going on here?' It just puzzles me that nobody is concerned."
Senator Robert Casey, a Pennsylvania Democrat on the Senate Finance Committee, sounded a rare discordant note this week, asking the SEC to show how it is addressing risks for buyers of stock in Chinese offerings structured like Alibaba's.
"American investors in Chinese companies often do not enjoy the same protections and legal guarantees that they are afforded when they invest in American firms," Casey said.
Alibaba has flown under Washington's radar for several reasons. The company, with embryonic US retail operations, has avoided attracting competitors' fire by stressing its focus on the underdeveloped Chinese e-commerce market. It has also defused US government criticism by intensifying efforts to prevent pirated goods being sold on its websites.
The company's version of a much-debated corporate structure has been designed to minimise potential risks to investors. In any case, Alibaba has little reason to expect regulatory trouble: the SEC has assented to the same device in dozens of public offerings since 2000.
As required, the company has listed risks to investors in its SEC filings, including warnings about the transparency of its audits and the chance that Chinese regulators could challenge the legality of its structure.
Contributing to Alibaba's momentum is a frothy market - the Standard & Poor's 500 index has doubled over the past five years - coupled with great investor interest in Chinese internet firms.
Michael Wessel, a member of the US-China Security Review Commission that last month released the report critical of Alibaba's proposal, said the market's enthusiasm reminds him of the 1990s internet boom, before many technology stocks plunged in value. "A lot of people are looking with glassy-eyed enthusiasm at some of these companies," Wessel said.
The US-China commission's staff review took particular issue with the corporate structure that Chinese technology companies often use to go public, equating it to an "intricate ruse" that leaves a small cadre of executives in control while giving American shareholders few rights.
Known as a variable interest entity, or VIE, the setup allows Chinese companies to dodge a home-country prohibition against foreign investment in key industries, including the internet and telecommunications.
All of the major Chinese internet companies that list on US exchanges use the structure, including Baidu, JD.com and Weibo.
Some multinationals, including Amazon, also use the structure in China, leaving them poorly placed to raise questions about Alibaba.
Alibaba designed its corporate structure to mitigate potential objections to VIEs, according to Paul Gillis, a professor at Peking University's Guanghua School of Management.
Unlike earlier Chinese companies, which went public with as much as 99 per cent of their revenue assigned to the VIE, less than 12 per cent of Alibaba's revenue and 8 per cent of its assets are sequestered inside the structure.
"Alibaba is one of the best in terms of minimising the amount of business conducted in the VIE," said Gillis.