Then why do these companies go public overseas through vie?
This is mainly because the China government prohibits foreign investment in certain fields, such as telecommunications, media and technology industry (TMT) projects, but such enterprises need foreign investment, technology and management experience for their development. Therefore, entrepreneurs, venture capitalists and lawyers in these fields have created a parallel enterprise structure to escape government supervision.
Overseas listed entities and domestic business entities are separated from each other. Overseas listed entities set up wholly foreign-owned enterprises (WFOE) in China. Wholly foreign-owned subsidiaries do not carry out their main business, but control the business and finance of domestic business entities through agreements, making the business entities become the variable interest entities of listed companies. In this way, overseas entities obtain income and assets, and domestic entities are responsible for operation and management.
Let's look at how a very typical VIE infrastructure is laid out.
1. The founder, co-founder and core management team will set up an offshore company or everyone will set up an offshore company, generally BVI, because it has the advantages of simple registration and high confidentiality.
2.BVI company and BVI, * * VC, PE and other shareholders set up a company together, usually Cayman, as the main body of listing.
3. The listed entity will set up another company in Hong Kong, holding 0/00% equity of Hong Kong company/KLOC.
The Hong Kong company will set up another wholly-owned domestic subsidiary (WFOE).
5. Then WFOE signed a series of agreements with domestic entities that actually operated the business, such as equity pledge agreement, business operation agreement and exclusive consulting service agreement. In short, through these agreements, listed entities can control domestic operating companies, enable them to operate domestic enterprises, distribute and transfer profits according to the wishes of foreign-funded entities, and finally transfer operating profits to overseas parent companies after paying taxes.
Earlier, we learned that VIE architecture has skillfully solved the problem of some industries going abroad for financing and listing. However, VIE architecture also has some shortcomings and risks:
1. Compliance risk
There are still some risks in the legality of overseas indirect listing of contract control mode, mainly from the changes of laws and government regulatory policies. Once the relevant state departments issue corresponding regulations, it may have an impact on companies that adopt VIE structure.
2. Tax risks
In VIE structure, domestic entities often transfer their income to WOFE in the form of service fees and intellectual property royalties through exclusive technical consultation and service agreements. This arrangement and transaction of related party transactions may cause tax problems, such as transfer pricing, which is often questioned by tax authorities and auditors.
3. Foreign exchange risk
The purpose of VIE structure is to realize overseas financing, and overseas companies will raise capital for domestic entities. Generally, profit transfer is realized through exclusive technical consultation and service agreement, and profits may also face foreign exchange control risks when leaving the country.
In addition, with the promotion of the registration system, the threshold for listing A shares has become lower, and enterprises have more opportunities to choose to list in A shares. It may be that the VIE structure built in the early stage needs to be demolished and the cost will be high.