Research On The Legal Risks Of Variable Interest Entities

Variable interest entity is a special purpose entities existing form, It can be said from the U.S. Financial Accounting Standards Board issued the FASB, the protocol control is based on variable interest entities as listed mode of the merger of the accounting statements and profit-shifting. This mode is now available at Sina listed on NASDAQ in the U.S., and later, has been widely used in Chinese enterprises overseas red chip, the initial design of the architecture in order to circumvent China’s Foreign Investment Industrial Guidance Catalogue on some industries, foreign investment limits, especially Internet companies, the early days of these enterprises are often financial strength is relatively weak, but in urgent need of funds to develop, but this enterprise some fixed assets such as land or real estate, it is difficult to obtain sufficient bank loans, so the early stage of Internet entrepreneurs are often recourse to the investment of venture capital institutions. However, the initial stage of China’s venture capital funds in Internet companies lower the level of development, the courage to higher investment risk of Internet companies are often foreign venture capital funds, so they are more familiar with the outside of the legal environment and financing policies, and more inclined to corporate red chips listed.Protocol control mode listed as compared with ordinary red-chip mode has many advantages, for example, associated with mergers and acquisitions do not need a report approved by the Commerce Department; do not have to pay the equity transfer of the personal income tax; no backdoor can save costs; foreign-owned enterprises can not directly control the domestic operating entities, certain degree of assurance, quality assets controlled by domestic entrepreneurs; shorter time to market and easy removal of red-chip architecture. However, due to protocol control in order to circumvent the laws of China was founded, and during operation to control the operating entity traditional shareholding structure, but with a strange series of agreements to complete control over the management of the operating entity. In policy and running the process will naturally have some risk.