Today’s VIE Rumorfest – Update for 9/27

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See update at end of post.

The rumors about pending moves by the government against the VIE structure (see my posts over the past few weeks if you need to get up to speed) have been coming in fast and furious. Today’s fun and games are courtesy of the Economic Observerthe original article is in Chinese only.

If Chinese is not your thing, you can have a look at a quick summary at iChinaStock. Beware, though. Their headline, “Listed Companies to be Exempted from VIEs Regulation, Chinese Media Reports,” is not exactly the message I take from the Economic Observer article.

Anyway, here’s what iChinaStock has to say:

Investors of Chinese listed Internet companies such as Sina(NASDAQ:SINA) and Baidu (NASDAQ: BIDU) may feel relieved, as China’s top regulator is reportedly to consider giving exceptions to the listed Chinese companies in the upcoming VIEs regulation.

The Economic Observer, one of China’s most renown business newspapers, said on September 24 that the listed Chinese Internet companies are likely to be excepted from China’s forthcoming regulation over Variable Interest Entities (VIEs) investment structure. But companies that have not yet to launch their IPOs may be subjected to the new regulation, the report said.

The newspaper cited an anonymous source who has seen the report that China Securities Regulatory Commission (CSRC) submitted to China’s State Council, or cabinet, saying that the Chinese top leaders suggest “old rules for old companies and new rules for new companies” (老人老办法,新人新办法) in their respond [sic] to the VIEs regulation.

Okay, let’s take a step back here for context. Several government agencies have been involved with the recent VIE goings-on, including the Ministry of Commerce (which acknowledged VIEs in a recent M&A regulation) and the CSRC, which is rumored to have authored a report calling for formal regulation of VIEs.

Does this Economic Observer article add anything to the discussion? Well, nothing for sure, and it certainly didn’t suggest that a decision has been made regarding different treatment of “old” versus “new” companies.

However, there are quite a few government agencies involved in this now, including MOFCOM, CSRC, and the Ministry of Industry and Information Technology (MIIT), the latter having jurisdiction over China’s Internet sector. It appears as though this issue has been kicked upstairs to the State Council, and that a formal regulatory framework may be forthcoming.

Some folks in the government have, according to the Economic Observer’s reporting, expressed a desire to essentially give listed companies a pass and focus on regulation of new entities. This is a rumor at this point, but it certainly does make some sense. It is a pragmatic stance that would allow for regulation of VIEs while not disturbing the status quo in the Net sector too much.

But that’s pretty much all we know at this point. If indeed the State Council Legislative Affairs Office (these are the guys responsible for reviewing/revising draft laws submitted to the State Council) has this now, then the issue is perhaps more sensitive than many of us thought.

Moving forward, it looks like new law in this area will have to satisfy national security concerns yet not wreak havoc with the Net sector. Given the competing interests in MOFCOM, CSRC, MIIT and other agencies, the process may not be easy.

Is this latest news good or bad for existing listed companies and folks in the venture capital/private equity biz? Way too early to tell, but I’ll stick with what I’ve said before: I would be surprised if new rules end up interfering with large, powerful listed companies. Again, no one wants that. On the other hand, new rules may make life more difficult for VC/PE investment. How difficult remains to be seen.

Update for 9/27:

Quick note that did not even necessitate a separate post. Caijing magazine passed along what I consider to be an extremely weak bit of rumor-mongering by Shanghai Securities News. I only reference it here because due to Caijing’s reputation, this will be factored in to all the VIE noise along with everything else.

Here’s the important bit:

An unnamed authority is quoted by an official newspaper as dismissing a report that China is considering regulations for a popular corporate structure widely used by companies, known as a “variable interest entity,” or VIE.

Essentially this is an unnamed source from an unnamed part of the government saying that a top-level regulation on VIEs may not be in the cards, and if it is, it will not include an outright ban. Perhaps this is simply a nervous “Hey, we’re not actually trying to kill these things” informal statement from the CSRC. If so, it doesn’t really add much to the conversation.

I think most folks already knew that an outright ban wasn’t being considered by anyone at this point. Whether new rules are in the offing (as the original post discusses) is still very much up in the air.

Sorry to add to the confusion, but there you have it.

2 responses on “Today’s VIE Rumorfest – Update for 9/27

  1. D

    Many Chinese companies (especially tech firms) that went public would not otherwise have dreamed of going public had they been in, say, Europe or the USA. Most of their revenues are very low, too low to even think of an IPO if they were in any other place but China.

    So, if VIEs are removed as a method for firms in China to raise capital via an IPO, the PRC govt is going to need to think very very fast about providing other means to draw in needed investment. For example, banks are going to need to start giving loans, etc.

    Investors should stop complaining and stop worrying. For many of the Chinese firms listed overseas, investors really need to worry about other matters (i.e. corruption, censorship, FCPA violations — remember why NTES was faced with delisting 10 years ago?) rather than whether VIE structures will live or die. But since investors have already overlooked many of these frailties of PRC tech firms in the past, they should be well-prepared to ride the dragon down the drain if VIEs are ruled non grata. Caveat Emptor.

    1. Stan Post author

      Indeed. Folks should also take note that the biggest deficiencies of VIEs themselves have nothing to do with regulatory risk but more of a JV-esque problem (like the one that happened with Gigamedia).