What is Variable Interest Entity?

Variable Interest Entities (VIEs), also known as "VIE structures", also known as "agreement control", is essentially a method adopted by domestic entities to achieve overseas listing. Refers to the separation of an overseas listed entity from a domestic operating entity. The overseas listed entity establishes a wholly-owned subsidiary (Wholly Foreign Owned Enterprise, WFOE) in the country. The wholly-owned subsidiary does not actually carry out the main business, but through an agreement. Control the business and finances of domestic operating entities so that the operating entity becomes a variable interest entity of a listed entity. This arrangement can transfer the interests of domestic operating entities to overseas listed entities through control agreements, so that shareholders of overseas listed entities (that is, overseas investors) actually enjoy the benefits arising from the operations of domestic operating entities. Company, business or investment. In March 2013, Li Yanhong's proposal of "Encouraging Private Enterprise Overseas Listing (VIE) to cancel policy restrictions on investment, mergers and acquisitions, qualification issuance, etc." sparked heated industry debate. ^[1]

Questions about the VIE structure from overseas markets and the Chinese government's tacit approach have made both investors and companies that need to attract capital take a conservative and wait-and-see approach to using the VIE structure for investment and financing. Many people worry whether the Chinese government will really "Surgery" even banned the VIE structure, which directly led to the stagnation of related transactions in the market. Is there a new model that can meet China's existing legal norms and policy requirements and is more effective?

The "cross-border control mode" (referred to as "MJCC" structure) shows its advantages. The new structure can provide judicial relief under multiple jurisdictions, thereby providing maximum legal protection for foreign investors. At the same time, a custodian mechanism is introduced in the new structure. The custodian should accept and strictly implement the instructions of listed companies, and can be flexible Introducing different measures according to the company's specific conditions can provide more effective corporate governance and more legal and operable solutions for the vast number of foreign investors, Chinese companies and founders.

The U.S. standard accounting standards state that a variable interest entity must have at least one of the following characteristics:

(1) If there is no additional financial support, then its risk bearing

Discussions on the "crime and punishment" of the VIE structure have occurred more than once. The emergence of the VIE structure was first to circumvent domestic restrictions on foreign investment. In the ten years that this structure has been borrowed by Chinese companies, it has indeed formed a lot of gray areas, and also brought many unknown gray solutions.

Internet industry sources said,

In March 2013, Li Yanhong suggested in the proposal that the state encourage private companies to list overseas, further clarify relevant regulations and policies, and guide the healthy development of VIE. First, it is recommended that the government revise existing regulations and introduce practical guidance based on international experience to encourage companies to use VIE to achieve overseas listing, obtain overseas investment, and promote leapfrog development. Second, in terms of investment mergers and acquisitions, license issuance, etc. Restrictions on VIE structured enterprises, full national treatment given to VIE structured enterprises, etc.

For this proposal, Sina Chairman Cao Guowei and Ekai Capital CEO Wang Ran all agreed. Wang Ran appealed accordingly: "It's time to give VIE a word for an innovative China." Angel investor Cai Wensheng is looking forward to seeing the proposal being taken seriously and accepted by the government: "It would be great to pass the proposal!"

Compared with the viewpoint raised by Zhang Jindong, member of the CPPCC National Committee and chairman of Suning, to strengthen the supervision of the VIE model, Internet observer Xin Haiguang believes: "Their two proposals appear to differ from each other on the surface, but they are actually focusing on different angles. The overall impact on the overall national economy is worth looking forward to. VIE is a set of innovative models for the development of Chinese private enterprises, especially high-tech enterprises, and helps a large number of enterprises to achieve international development. The government should pay attention to what Li Yanhong mentioned about VIE The solution of this problem is an important step in supporting strategic emerging industries and accelerating the transformation. It is also a key measure that has continued the fruitful achievements of China's economy for more than three decades and made Chinese enterprises truly become market players.