RIYAD: China is considering banning companies from entering foreign stock markets through entities with different interests.
This will fill a gap that the country’s tech industry has long used to raise capital from foreign investors, according to Bloomberg.
People familiar with the case, who asked not to be identified while discussing private information, said the ban, aimed in part to address concerns about data security, is among the changes included in a new one. China’s draft overseas registration rules that could be finalized as early as this month.
Firms using what’s known as the VIE (Variable Interest Entity) structure would still be allowed to pursue initial public offerings in Hong Kong, subject to regulatory approval, the sources said.
VIE refers to a corporate structure in which an investor has a majority stake even if he does not have a majority of the voting rights. An enterprise that is the primary beneficiary of a VIE must disclose the holdings of that entity as part of its consolidated balance sheet.
China’s Securities Regulatory Commission said on its website on Wednesday that a media article about banning offshore listings from companies using the VIE structure was incorrect, without giving further details.
Currently listed companies in the United States and Hong Kong that use VIEs will need to make adjustments so that their ownership structures are more transparent in regulatory reviews, especially in sectors where foreign investment is prohibited, the officials added. sources.
The reform would mark one of Beijing’s most important steps to crack down on offshore listings.
Authorities have since moved quickly to stop the flow of companies seeking to go public in the United States, shutting down a channel that has generated billions of dollars for tech companies and their Wall Street backers.
While a global ban on the VIE structure is not being considered, a halt on foreign listings and a re-examination of Hong Kong’s initial public offerings will mean that the model will not be a viable way for many startups to access markets. capital.
A person familiar with the matter said some investment banks have already been advised by regulators to stop working on new transactions involving VIEs.
VIE’s demise would also threaten the lucrative trading streak of Wall Street banks, which have helped nearly 300 Chinese companies raise around $ 82 billion from the first sale of US shares in the past decade.
VIEs have been a constant source of concern for global investors due to their volatile legal situation. Sina Corp. and its investment bankers led the way in an initial public offering in 2000, and the VIE framework was not formally adopted by Beijing.