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In an alert to investors, the SEC detailed the
potential risks in putting money into U.S.-listed companies that
have contracts with but no control over a Chinese entity, known
as a variable interest entity (VIE). It is the most recent move
by the agency to address concerns that Chinese companies are
flouting rules for accessing U.S. markets.
In July, the agency said
https://www.reuters.com/business/
finance/exclusive-us-regulator-freezes-chinese-company-ipos-over-risk-disclosures-2021-07-30
it will not allow Chinese companies to raise money in the United
States unless they fully explain their legal structures and
disclose the risk of Beijing interfering in their business.
Earlier this year, the agency began rolling out a new law, aimed
at China, that would kick foreign companies off U.S. stock
exchanges if they do not comply with U.S. auditing standards.
According to the SEC, these U.S.-listed companies often own a
subsidiary in China that was formed to enter into the
contractual arrangements with the China-based VIE. The contracts
can include powers of attorney, equity pledge agreements, and
exclusive services or business cooperation agreements.
The VIE structure is typically used because of Beijing's
restrictions on non-Chinese ownership of companies in key
industries in China, the SEC said. In selling shares to U.S.
investors, the firms are raising capital from U.S. investors
without distributing ownership of those firms to them.
The SEC warned investors that they are exposed to risk if
Beijing determines they violate Chinese law, may be subject to
Chinese jurisdiction in enforcing any contracts and may be
affected by conflicts of interest between the owners of the
entity and U.S. shareholders.
(Reporting by Chris Prentice; Editing by Aurora Ellis)
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