![]() ![]() ![]() The CCP has overlooked this for many years for a variety of reasons, but it was foolish for investors to believe that Beijing was never going to take action. But the fact remains that this VIE structure is technically illegal in China: It’s a blatant circumvention of Chinese laws. That isn’t a problem if the investors know what they’re signing up for when buying into Chinese IPOs. The two shareholders were notably upset by company founder Jack Ma’s alleged asset-stripping, but had little recourse. Case in point: Major Alibaba shareholders Yahoo and SoftBank had no say when Alibaba spun off the very valuable Alipay in 2011. shareholders don’t actually own the company and have no real say or voting rights in how it actually does business in China. A Didi autonomous taxi is performing a pilot test drive on the streets in Shanghai on July 22, 2020. Since Sina’s landmark IPO, this practice has been the norm in offshore IPOs of Chinese technology giants ever since, including those of Alibaba, JD.com, Baidu, and, most recently, Didi. It’s not quite that simple, but it’s a passable illustration. But instead of buying me out and actually owning the company, you and I enter into a paper contract where I promise to pass all future profits of the company onto you in perpetuity. Put differently, it’s as if I owned a company and you wanted to buy it. SOURCES DIDI KEEP LINKDOC US SERIESinvestors would buy shares in a Cayman Islands or British Virgin Islands (BVI)-registered shell company (the VIE), which in turn holds synthetic economic interests in the actual Chinese company through a series of legal agreements. Sina utilized a complicated legal structure involving a series of variable interest entities (VIEs) to circumvent Chinese regulations around foreign ownership. The CCP prohibits foreign ownership in industries it considers critical to national security, including the technology sector. That year,, which owns Weibo, became the first Chinese technology giant to IPO in the United States. We have to go back to the year 2000 for context. After the CCP scuttled Ant Group’s IPO last year, investors up-in-arms about Didi either haven’t been paying attention or haven’t done their homework. To start, the crackdown on Didi and other technology giants by the Chinese Communist Party (CCP) shouldn’t have been surprising. ![]() But one thing is for certain: Chinese stocks will never be looked at in the way same going forward. Investment professionals from Kyle Bass to Jim Cramer decried the news and questioned whether Chinese stocks are investable. Two lawsuits filed in New York and Los Angeles by investors accused Didi executives and its lead underwriting banks of failing to disclose ongoing investigations that occurred prior to Didi’s listing. Didi’s NYSE-listed shares plunged below the IPO price. The fallout of this was immediate and severe. The Cyberspace Administration of China’s investigation was to “safeguard national data security and protect national security.” Just days after Chinese ride-hailing company Didi Global Inc.-the U.S.-listed affiliate of Didi Chuxing-was IPO’ed in New York earlier this month, China’s cybersecurity watchdog launched an investigation into the company and removed its app from Chinese mobile app stores. The United States and China are beginning to agree on one thing-that Chinese technology companies selling shares on U.S. ![]()
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