China to tighten rules for tech companies seeking foreign funding

China is trying to limit the role of foreign shareholders in the country’s next-generation technology companies by creating a blacklist that severely limits the main channels that start-ups use to attract international capital and go public.

Blacklists are so-called Variable Interest Entities According to four people familiar with the matter, to run their Chinese business. They didn’t expect the changes to apply to existing businesses.

VIE has been used for decades by Chinese technology groups, including industry leaders Alibaba and Tencent, to circumvent foreign investment restrictions and raise billions of dollars from international investors. It is a legal structure.

This list has been produced by Chinese authorities such as national planners, the Ministry of Commerce, securities regulators, and central banks, and last week the technology for the past year announced by Didi of the ride-hailing service group. It follows the crackdown on the department. Delisting From the New York Stock Exchange.

It’s not yet clear how extensive the list will be, but those familiar with this issue will find VIE’s new negative list Data intensive Or with national security concerns.U.S. took Similar measures Limit China’s investment in Silicon Valley start-ups.

Chinese authorities say that a large domestic consumer internet group Eliminate competition Instead of helping the country catch up with the United States with semiconductors and other advanced technologies.

Regulatory authorities have antitrust laws and data security measures in place for major companies. Billionaire Jack Ma Last year, Ant Group had to cancel the world’s largest initial public offering.

Two people close to financial regulators said the negative list was not intended to affect existing companies using the VIE structure.Instead, it is a future national champion that is important to the country’s economy Controlled by foreign shareholders..

“VIE isn’t completely dead, but it’s essentially dead. [for future purposes]”Someone said.

“In the future, foreign investors will be able to invest in traditional industries rather than technology,” he added, adding that such industries did not have to use the VIE structure to bring in foreign capital. ..

China Technology Group Turned to VIE Twenty years ago, authorities have not officially dealt with the complex legal structure and want to leave it in the gray area of ​​regulation.

With this system, Japanese Softbank and Sequoia Capital China To pour billions of dollars from foreign pensions, sovereign wealth funds, family offices and university funds into China’s most promising internet starters.

This is done by acquiring shares in an offshore holding company established in the Cayman Islands. The Cayman Islands then enter into a series of contracts with the onshore Chinese companies that hold their shares and the state founder of China.

If successful, such companies will highlight offshore shell companies in the United States or Hong Kong. According to a review by Capital IQ Data’s Financial Times, 79% of the 241 New York-listed Chinese companies use VIE to operate their Chinese operations.

Visualization of variable interest entities in China

Beijing could release a blacklist as early as this month, the two said.Another said publishing the list may depend on how the United States handled it. New rules A Chinese company trading in New York.

China’s securities regulator said on Sunday that the Bloomberg News report that the country bans VIEs from foreign IPOs is not true and is using the structure to delist from U.S. exchanges. He added that he was not imposing a company.

Chinese authorities Ban on VIE investment This year in the national education sector. Foreign investors have also generally avoided using this structure for the most sensitive industries, such as defense companies and biotechnology companies that handle genetic data.

Lawyers and investors have stated a negative list that exemptions from existing structures could help fully justify VIE’s legal contracts governing hundreds of Chinese tech companies. ..

Alex Roberts, a lawyer at Linklaters in Shanghai, said the Chinese government tried to regulate VIE six years ago and drafted a law to reclassify VIE based on the final manager.

“But the proposal was finally canceled … probably because of the enormous economic and social benefits that some of China’s largest companies using these legal structures bring to the country.” He said.

China’s national planners, the Commerce Department, securities regulators, and central banks did not immediately respond to requests for comment.

Additional report by Andy Lin of Hong Kong

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