On The Legal And Regulatory Compliance Of Vie Corporate Structure

September 19, 2014, Alibaba officially launched on NYSE. Its IPO became the largest ever at twenty-five billion dollars. While all the people are talking about the wealth legend of Alibaba, the concept of variab le interest entity has been pushed to the hub of the discussion, because of Alibaba’s complicated ownership structure and controlling mode.Variab le interest entity is the commonest adopted structure of Chinese companies who wants to IPO on the foreign stock market. It starts from the IPO of SINA on NASDAQ, so we also call it SINA Mode. The operating mode of VIE are: firstly, establish a company on some offshore financ ial jurisdiction like Cayman or BVI, and then the offshore company may us e contracts or its shares of the company to control the actual profit entity inside China, and by this way, to realize the interest transfer and effective control of the company inside China. This structure may help foreign investors to avoid the limitation regulation of foreign investment access rules of China, and also the foreign company can enjoy tax preferences and favorable foreign exchange polic ies. The consequence of the operation is that foreign investors are involved into some foreign-limited industries.However, the risk of VIE is also considerable. Firstly, since this structure does not adopt the traditional controlling mode, the offshore listing company can only have weak control power of the operation company ins ide China. The Chinese company is easily to break the controlling contracts. VIE are lack of laws to regulate, so that once the contracts are broken, the injury parties are hard to request remedies. Secondly, VIE lies on the grey areas of Chinese regulation; it inc lines to avoid the limitation regulation of foreign investment access rules of China, and lacks of the claims of legitimacy. Once Chinese government declared null and void of the structure, all the companies who adopt the structure will be sank in great risk.This thesis tries to start from two cases of Alibaba, to analyze the birth, development, and regulation history of VIE in China and aboard, and aims to figure out the ways of governance.The first section mainly d iscusses the definition and study background of VIE, and put forward the contribution and weakness of this thesis.The second section introduces the mode of IPO abroad, which are direct and indirect IPO. This section will study this two way of IPO separately. Generally speaking, ind irect way is to use VIE structure, and I hope the thoroughly study of indirect IPO will help to figure out the reasons and effects of VIE in China.The third section mainly introduces two cases of Alibaba. I start from the Alibaba’s IPO 2014, which shows the complicated structure of VIE, and then analyze its risks. Second case is the Alipay scandal which happens in 2011, this event gives us an overall reveal of the inherent risk of VIE, and the event also sets off a wave of discussion of VIE.The fourth section studies the VIE from comparative law angle, and tries to figure out what will be faced by Chinese companies through the research of the US regulation attitudes and measures of VIE.The fifth section will base on the above study of VIE, and combine with the newly drafted Foreign Investment Law, to analyze the regulating measures and policy inclination of VIE. We may come to the conclus ion that the fundamental measures are enlarging the financing way, broadening the scope of foreign invest limitation, and strengthening the regulation and supervision of sensitive industries, which may let the companies abandon the VIE structures, and come back to traditional controlling mode.