Research On The Legal Supervision Of VIE Structure Under Foreign Investment Law

Variable Interest Entity(VIE)structure,being one of the internationally recognized investment methods and also a popular option that Chinese companies opt for when going for indirect listing in overseas,has always been in an "awkward" position under the Chinese law:The "Foreign Investment Law of the People’s Republic of China"(hereinafter referred to as "Foreign Investment Law")has not provided a clear legal position for investments made via VIE structure;the laws and regulations that govern VIE structure are at a lower level and the system is chaotic.the legislative and law enforcement agencies are both having a lackadaisical attitude.the VIE structure itself is flawed with a "two-side" of internal and external legal risks etc.Therefore,research on the legal supervision of the VIE structure is of practical significance.This article is divided into four major parts:The first part is the overview of the legal supervision of the VIE structure under the Foreign Investment Law.The VIE structure is said to be a mode of controlling the operation of the actual operating company and the merger of financial statements by signing various agreements,thereby circumventing domestic legal supervision and realizing overseas listing and financing;the legal supervision of the VIE structure under the Foreign Investment Law refers to China’s foreign investment regulatory authorities applying the Foreign Investment Law to supervise the VIE structure;as the VIE structure itself is flawed with internal and external risks.Thus,it is necessary to put VIE structure under regulation via the Foreign Investment Law;The second part comprises the status quo and problem analysis of the legal supervision of the VIE structure under the Foreign Investment Law.Currently,there are ten in-effect normative documents pertaining to VIE under the Foreign Investment Law,which in practice,has yet to achieve the desired result.The problems are as follows: First,the supervisory body is unclear.Second,the relevant declaration systems cannot meet the desired result.This is due to the inadequacy of information attained under the current information declaration system and the fact that there is only one regulatory body that receive such information,which made regulation ineffective.Besides,the penalties under the declaration system for concentrated business operators are too light and the current implementation of relevant laws as well as regulations is not effective enough to provide clear guidance to VIE-structured enterprises so as to allow these enterprises to fully rely on the regulatory body in securing their interests.Therefore,it seems that there is a tendency of "campaign-orientated law enforcement enforcement" by the regulatory bodies.Third,the Security Review System has not clarified if there would be a retroactive effect if the Measures for the Security Review of Foreign Investment came into effect.The third part is pertaining the examination of legal supervision on VIE structure in other jurisdictions.Upon investigating those mature practices of the European Union,the United States and Hong Kong,China in regulating VIE structure,it led to the following conclusions:First,the securities regulatory agency shall be the core supervisory authority.Second,there must be a strong information disclosure system.Third,a huge penalty shall be imposed for market entities that violate the concentration of business operators declaration system.The fourth part is the perfection of legal supervision mechanism of the VIE structure under the Foreign Investment Law.The suggestions for improvement are as follows: first,clarify the supervisory body for the VIE structure;second,improve the relevant declaration system.In relation to the information declaration system,enhance the management for information declaration,increase the receiving agencies of such information and expand the scope of information disclosure.In regard to the declaration system for concentration of business operators,more anti-monopoly declaration guidelines in relation to specific industries must be introduced so as to support those anti-monopoly declarations and a more severe punishment for violating the declaration of concentration should be imposed.Third,establish the retrospective effect of the foreign investment security review system so as to extend the applicability of the Foreign Investment Security Review Measures to the period before it came into effect.