Study On The Legal Regulation Of VIE Mode

Variable interest entity, hereinafter referred to as VIE, is a new rule in American accounting standards after Enron event. VIE is a regulatory tool to supervise the enterprises’ illegal action of hiding debts and their non-performing assets in China. However, VIE became a tool of law invasion because of the rigid and strict limitation of foreign capital admission. And the current supervision policies focus on stock control rather than on contractual control. Because of this legal loophole, VIE is treated as a civil invention in China, and its structure is complicated and subtle. On one hand, VIE uses American accounting standard to realize consolidation of financial statements. On another hand, VIE can avoid China’s supervising policies. Therefore VIE became a popular way for domestic enterprises to go public abroad. For instance, many IT companies listed overseas by VIE structure, such as Sina, Baidu and Jiayuan. VIE is also called Sina Mode because Sina used it firstly.However, Alipay event indicates that there are many risks in VIE, and some people also maintain that VIE has no future in China. The risks in VIE include policy risk, default risk, and other risks in foreign exchange control, tax inspection, merger review and anti-monopoly review. Those risks made VIE become a tower established on sands. The investors worry about the risks in VIE and this situation is not good for investment and financing.This dissertation studies on the legal issues in VIE with the following parts. The first part analyzes the term VIE and other related terms in different contexts. The second part introduces the current practical situation and discloses the legal issues in VIE practice, especially with the typical case of Jiayuan. The third part focuses on the risks in VIE and emphasizes that the current practice bases on the supervisor’s acquiescence and the counterpart’s commercial credit, but the balance has been broken after Alipay event. Therefore, we have to consider the urgent issues about the supervision of VIE, The last part put forwards some suggestions on supervision principles, concepts and specific measures, especially adds VIE into the scope of supervision, with actual controller as the standard of judgment, which realizes the transition from legal formalism to legal realism. Unifying the expressions in regulations of supervision and reducing the items that need administrative approval are important to the improvement of VIE supervision as well. More importantly, the legal regulation on VIE mode should be within the limited and necessary scope by some other measures, such as improving the domestic capital market system construction, solving the financing difficulties of private enterprises and small and medium-sized enterprises, and relaxing the restrictions on admission of foreign investments. With the efforts presented above, the contractual control can be transformed to equity control.