| Currently, the overseas listing is favored by the domestic enterprises as an effective way of cross-border financing. With the rapid development of China’s economy, the overseas listing has become an important channel for the foreign investors to invest abroad. In a variety of modes of overseas listing, VIE mode is one of the most favourite modes of overseas listing among domestic enterprises. As the end of 2014, there are more than 300 domestic enterprises listing on the America’s major stock exchanges, in which the amount of domestic enterprises adopting VIE mode has accounted for half the domestic companies listing in the United States. Among the domestic enterprises listed on NASDAQ, more than 54% of which adopted the VIE mode. But meanwhile, more Chinese enterprises were attacked by short sellers in America. On 21 November 2011, Focus Media was shorten by Muddy Waters Research and delisted for the share price’s falling by 60%. On 18 July 2012, New Oriental was shorten by Muddy Waters Research and the share price fell by 70%, which was saved by the investigation of Securities & Exchange Commission and the financial support from Chinese entrepreneurs, and finally the share price recovered. In 25 October 2013, the Net Qin Company was accused of false information by Muddy Waters Research and the share price fell by 47%, which was suffered for a long time. In 28 January 2015, Alibaba Group suffered from class action suits by the American firms and its 42 million shares were sold in the same day. The profits of Alibaba fell by 964 million dollars in the fourth-quarter earnings.It seems that the VIE mode has been the preference for the companies applying for listing and has been the lightspot of the listed enterprises. Nevertheless, huge risks are hidden behind the shiny face. The listed enterprises adopting VIE mode were suffered from class action suits, shorting by the short sellers, investigation from supervision organizations and delisting due to financial fraud, credit crisisfalse and long-term mismanagement. The reasons behind are the skepticism to the feasibility and validity of VIE mode. That’s why the Chinese shares repeatedly suffered heavy losses abroad. Faced with the situation, the Chinese regulatory agencies suffered criticism for inaction, while the Ministry of Commerce Commission, China Securities Regulatory Commission and other regulatory agencies still make no positive response and do not introduce any relevant law of VIE mode. With the application of VIE mode in a wider range and in more industries, the legal risks are also increasingly prominent. VIE mode could not have been wandering in the grey zone of legal regulation. At the beginning of 2015, the Foreign Investment Law(Draft for Comment) was released. The Draft implies the endness of the legal vacuum, while only three kinds of regulatory ideas of VIE mode were put forward, and nothing about the improvement of the current legal supervision system, the treatment to the existing VIE mode and the new VIE mode in the future was mentioned. Thus, this paper analyzes on these issues in order to reveal the reasons behind and find out the solutions to the VIE mode.The first part of the paper introduce the VIE mode as a whole, pointing out the source of the concept of VIE and illustrating that the VIE concept came from accounting in the United States after the Enron Scandal, when the authories introduced the concept of Variable Interest Entities for improving the government to Special Purpose Entities(SPE). The paper then introduces the relevant concepts of VIE mode, leading the readers to have a clear and overall understanding of VIE mode. The paper illustrates the classification of indirect listing, the exchanges for overseas listing, and the general sites for registration abroad respectively, and meanwhile, the paper introduces the reasons for the emergence and development of VIE in China in detail, revealing that the VIE mode has inevitable legal risks.The second part of the paper analyzes on the legal nature of VIE mode, analyzing on the validity and feasibility of VIE mode from the aspects of Contract Law, Administrative License Law and Company Law, and discussing if the VIE mode has broken the clauses of “concealing illicit purposes in a lawful manner” and “the mandatory provisions of law”. The paper analyzes on the hidden legal risks of VIE mode from the aspects of the risk of breaching the contract, the risk of jurisdiction, the risk of policies, the risk of overseas listing and so forth. In addition, the paper introduces several representative cases in practice to further verify the legal risks, including the cases of Giga Media, Ambow Education, Alibaba, New Oriental Education and other enterprises. In the aspect of judicial judgment, the paper discusses a arbitration award of Shanghai Arbitration Commission and a judgment from the Supreme Court to Chinachem Group, illustating the real risks and potential risks of VIE mode.The third part of the paper focuses on the current regulatory measures to VIE mode and analyzes on the supervision system of VIE mode. With the increasing of risks of VIE mode, the United States and Hongkong have introduced several measures to the supervision of VIE mode. However, the domestic and foreign regulatory agencies both show toleration to VIE mode. The domestic regulatory agencies avoid the regulation on VIE mode, while Hongkong and the United States increase the supervision on VIE mode from the perspective of investor protection in means of strengthening the information disclosure regime of listed enterprises on business and finance, increasing the guarantee liability of Chinese intermediary institutions, especially the Chinese lawyers.In the face of the regulatory difficulties in VIE mode, the fourth part of the paper focuses on the introduction of the new Foreign Investment Law(Draft for Comment), and analyzes on the reasonability and inadequacy of the Draft. The paper further proposes the legal suggestions for reconstruction of the existing regulatory framework, and figuring out that there shall be a lot of tasks to be completed before the Foreign Investment Law is formally implemented in order to achieve the effective supervision and get rid of the existing regulatory difficulties on foreign investment. |
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