Study For The Potential Risk And Legal Regulation Of VIE

VIE structure,known as Variable Interest Entities,is virtually a financial concept according to the 46 th interpretation of Financial Accounting Standards Board,not a specific legal concept.It should be interpreted as protocol control in legal context.The Securities and Exchange Commission(SEC)of US accepts and acknowledges the existence of the VIE structure,Chinese stocks are able to list in the overseas securities market.That the domestic enterprises listed in Hong Kong is the same principle,this phenomena provides this paper with the practical significance.VIE structure,also known as the special pattern of the red-chip listing,is referred to the domestic enterprises going public overseas through legal indirect listing framework,the subsidiaries of overseas listed company control the operating entity by a package of deals as "authorized agreement","the sole service agreement" and "exclusive option agreement" and "equity pledge agreement" to achieve the goal of "merge" operating entity.The domestic company gains capital support through overseas listed company's foreign capital financing so as to avoid the corresponding regulations.The VIE structure was born in the soil of loose regulation,continues to benefit from the special regulatory environment,developing up to now.The VIE structure exists because of the inadequate development level of China's venture capital market.The emerging enterprises,Internet companies due to the their small size,strong innovative,few financing channels,based on the purpose of the expansion or financing,seek overseas listing;VIE structure exists because of the ban and restrictions on foreign investment in some industry areas,domestic companies built VIE structure in order to circumvent the industry restrictions;At the same time,overseas market through the VIE structure brings the advanced overseas technology and capital support to domestic enterprises.Domestic enterprises seeking overseas listing mainly have the options of listing of direct or indirect way,indirect listing specifically includes buying existing shell company or building a shell company.Due to the "456" requirements of CSRC regulation which puts strict control on the financial amount of companies,namely "net assets of not less than 400 million Yuan,over the past year after-tax profits of not less than 60 million Yuan,and the financing amount of not less than $50 million".Back-door listing because of the high cost of outside shell company and the huge risk of instability and failure,is also gradually marginalized by the domestic enterprises;Listing-by-making-shell due to its flexible,easy operation,becomes the most favored way of overseas listed companies.The author discusses that the VIE structure is one of the most special way of Listing-by-making-shell.In 2006,the ministry of commerce and other six ministries jointly issued "the regulation on foreign investors merging and acquiring domestic enterprises"("10").Merging and acquiring domestic enterprises shall be submitted to the ministry of commerce for examination and approval.In the case of such regulation,VIE structure as a protocol control,which does not involve equity control of domestic enterprises successfully avoids " 10" that merging and acquiring domestic enterprises must be approved by the ministry of commerce.VIE structure as the main way to evade foreign investment restrictions in some areas,later with "10",flourishes from the restricted field of foreign investment to the current wide field applied to listing abroad.In this kind of situation,we can't ignore the alipay event,the wave of new oriental,causing adverse conditions.The cause of regulatory loopholes and inexperienced regulations prompted the instability of VIE structure in the foreign investment.Review the regulatory road,regulation of authority departments on the definition of the VIE structure and the presence of legitimacy is a grey area,once described as ambiguous existence by domestic and foreign investment banks and legal practice,regulators do not even make consistent legal norms.Building VIE structure is actually a series of arrangements,arrangements as compared to equity control entail the natural risk such as rapid policy influence,unilateral breach of contract and the instability of mandate.In reality,such risks cause the lack of investor confidence and turmoil in the capital markets.Domestic regulators ending grey area of the regulatory status is the trend of policy direction.Notably,in addition to VIE structure's failure in various appearing in the operation process,due to frequent failure and even tragic ending of strong sell of the Chinese stocks in overseas stock markets,many listed companies with VIE structure choose to return to domestic securities market in recent years.The removal of VIE structure also has risk as the process of running.Regulation and supervision of VIE meets new challenge to avoid causing confusion in the capital market when removing the VIE structure since the lack of supervision of VIE structure form beginning.As outlined in the above background,the VIE structure is a problem in some degree based on the grey area of the legal regulation,operation and removal of the VIE structure requires the guidance of the law and code,requires the continuous improvement of the regulatory environment.The author discussed from the meaning and origin of the VIE structure to clarify the basic of the VIE structure,and illustrated the risks of the operating process and removal of VIE structure.Once again,the author focused on the regulatory status of the VIE structure in our country to make clear defects and put forward with some advices.Citing the regulation of Hong Kong and the United States securities market on VIE structure gives enlightenment to the legal regulation in our country.Finally,the author combined the VIE structure regulations in the near future and the future development to explore the influence on the VIE structure,put forward some prospects about the future and development of VIE structure.