Alibaba structure poses 'major risks' to investors

Shareholders in the United States face "major risks" from investing in Chinese internet companies such as Alibaba Group Holding that use variable interest entities (VIEs), according to a US congressional commission report.

Risks are associated with these entities because the structures create holding companies to link foreign investors to Chinese firms through a set of complex legal contracts, according to a report released on Wednesday by the US-China Economic and Security Review Commission.

There was a "high probability" Chinese courts would not uphold those contracts, the report said.

Alibaba, now preparing for what could be the largest initial public offering in the US, would follow Chinese internet companies Baidu and Weibo in securing a US listing using the structure.

Such entities, usually based in tax havens such as the Cayman Islands, helped circumvent Chinese restrictions on access to foreign capital while putting investors at risk from their legal complexity, the commission said.

"The legal contracts that serve as the basis of the structure are enforceable only in China," the report said. "As internet giants Alibaba, Baidu and Weibo become synonymous with 'Chinese Amazon', 'Chinese Google' and 'Chinese Twitter', risks could mount for unsuspecting US investors who buy into their precarious VIE structures."