Study On The Legal Issue Of Chinese Private Enterprise Listing In Red-chip Structure

Owing to the restriction of Chinese laws and regulations, most of the privateenterprises in China are more likely to list abroad in order to meet the needs offinancing. However, it still needs the approval of China Securities RegulatoryCommission and it is as hard as to list directly in domestic securities market, too.Thus, using red-ship structure to list indirectly abroad has become one of the bestways to avoid reviewing by Chinese authorities. Red-chip in this article refers todomestic companies setting up Special Purpose Vehicle (the “SPV”) in off-shoreislands such as Virgin, Cayman or Bermuda, SPV getting those domestic companies’equities by acquiring or stock exchanging. After above steps, domestic companies hasbeen changed into Foreign Invested Company (the “FIE”) and SPV could list abroad.During the decade years of red-chip process, relation laws and regulations in Chinachanged over and over, sometimes it loosen but sometimes it restrict privatecompanies listing abroad by red-chip structure. VIE mode was introduced and moreand more widely used then cause the game between enterprises and government.VIE mode refers to off-shore company setting up domestic FIE, FIE assigning aseries of controlling contracts with the on-shore company who operates the mainbusiness in China so that the profit can be transferred to SPV in order to reach the listing standard. In the active red-chip structure, FIE acquiring or changing stock withon-shore company was restricted by relation industrial policy and needed approval byChina Commerce Ministry, but VIE mode can avoid those obstacles and helps privateenterprises listing abroad successfully.VIE mode is a product that invented under the special history condition of China,it helped the owner of private enterprises financing abroad without losing the right ofcontrol and became the most effective way of business expanding. However, theefficacy and stability of VIE mode faced doubts recently, new policy was alsoformulated to restrict VIE mode. The voice of damaging Chinese economy safety islouder and louder these days.After analyzing the character of VIE mode, the author put forward somesupervision suggestions for VIE mode. Besides confirming the positive effect toChinese private enterprises, measures are also needed to be taken such as modifyingrelation industrial policies, enhancing regulation afterward listing, uniting opinionsamong each ministry. As after all, the invention of VIE mode is to avoid domesticpolicies and reviewing, government should optimize legal environment to support thedevelopment of private enterprises and prohibit the VIE mode at last.ChapterⅠof this article mainly elaborates the concept, characteristic and basicsteps of red-ship listing and reviews the red-chip process of private enterprises inChina from1999. ChapterⅡ describes the content of VIE mode in detail and analysescase of Qinfa, the Chinese private company which successfully listing in Hongkongsecurities market by VIE mode. ChapterⅢ summarizes the superiorities andshortcomings of VIE mode and put forward some measures to solve the policyobstacle. ChapterⅣ analyses the regulation gap now and the attitude that governmentshould has. After all, improvement measures are finally proposed.