Chinese Initial public offerings using variable interest entities – a popular structure to bypass the mainland’s foreign investment rules – will reportedly face more regulatory scrutiny with increasing concerns about data security.

On Wednesday this week, «Bloomberg» reported that Chinese regulators could at least partially ban companies going public on foreign exchanges via variable interest entities (VIE) – a matter that would be denied by the China Securities Regulatory Commission (CSRC) in the same day as «not true».

According to the report citing unnamed sources, the CSRC is planning a VIE ban as part of broader changes included in a new draft of China’s overseas listing rules which could be finalized as soon as this month.

Companies currently listed in the U.S. and Hong Kong under the VIE structure would need to adjust to make their ownership structures more transparent for regulatory reviews, especially sectors deemed off-limits for foreign investment. Some investment banks have already been advised by regulators to stop working on new deals involving VIEs. 

Hong Kong: Safe Zone

Interestingly, the «Bloomberg» report notes that Hong Kong IPOs using VIEs would be allowed and one day later, an «SCMP» report, also citing unnamed sources, said the CSRC had been consulting with the Securities and Futures Commission (SFC) alongside leading investment bankers, accountants and lawyers on VIEs, prompted by a lull in listing activity in the city.

The report reiterated the CRSC’s view that there were no plans to ban VIEs, adding that Beijing wanted to continue supporting mainland Chinese companies’ fundraising efforts abroad.

VIE History

The VIE structure has been popularly used by firms to bypass Chinese rules on foreign investment in sensitive sectors such as the internet industry by transferring profits to an offshore entity in jurisdictions like the Cayman Islands or British Virgin Islands with shares that can be owned by foreign investors. 

The structure was first pioneered in 2000 and over the last decade, it has helped almost 300 Chinese firms raise about $82 billion through U.S.-based IPOs.