China’s new VIE rule eases concerns about overseas IPOs following months of uncertainty after Didi probe
- China’s securities watchdog published a new draft regulation stating companies can list overseas as variable interest entities if they meet compliance rules
- A requirement for security reviews of certain companies seeking overseas listings after Didi Global’s New York IPO led to uncertainty about the VIE structure
China’s securities watchdog has given tacit approval to a corporate structure that lets technology companies raise funds offshore, closing a two-decades-long regulatory loophole that has become a lightning rod in rising US-China tensions in capital markets.
Chinese companies set up as variable interest entities (VIEs) are allowed to list in offshore markets if they register with regulators and meet compliance rules, according to a draft of a new regulation released on Christmas Eve by the China Securities Regulatory Commission (CSRC). The regulation also allows mainland-incorporated firms to directly list overseas without the need for a VIE if they meet the requirements. The draft was published online to solicit public opinion through January 23.
The regulator said it would only assess the truthfulness, accuracy and completeness of submitted documents before giving applicants a green light for offshore listings, indicating that the registration-based system is not a stricter approval process.
“The draft rule ends months of speculation about China’s stance on VIEs, and it turns out to be friendly to those cash-starved tech companies and foreign funds,” said Cao Hua, a partner at private-equity firm Unity Asset Management. “At least companies that previously looked to list shares abroad via the VIE structure can stick to their fundraising plans and focus on business growth.”
A VIE structure allows founders and investment funds to set up offshore vehicles that can sign contracts with Chinese firms, giving the latter effective control of the entity.
VIEs have been used for decades in capital markets, coming to prominence after the collapse of Enron. They are often used by Chinese companies that list on overseas stock markets, primarily the United States, to get around China’s ban on offshore investments in industries deemed to be strategically sensitive, such as the internet, fintech and telecommunications.
As of mid-September, a total of 545 mainland companies, most of which are tech start-ups, raised funds offshore through the system, according to a research report by Guotai Junan Securities.