Stan Abrams: Variable Interest Equity Is A Very Risky Structure

In this episode of China Money Podcast, guest and Chinese law blogger Stan Abrams discusses:

– What is VIE and why do investors use them in China?

– Alibaba Group’s transfer of key asset without consent of shareholders including Yahoo: Is this a wake-up call for investors?

– What should investor do post the Alibaba-Yahoo dispute: Can risks be managed?

– Tudou Holdings’ pre-IPO nightmare: What lessons should investor learn?

– Finally, is there a way to get around VIE?

About Stan Abrams:
Stan Abrams is a Beijing-based lawyer with focuses on technology, intellectual property and Internet-related law issues. Mr. Abrams has extensive experience in foreign direct investment in China, having worked here for over 12 years. He also teaches law at Beijing’s Central University of Finance and Economics. He authors blog China Hearsay.

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  1. Stan, thanks for the update on whether VIE is entity or equity. I have heard both, and they both apply to BIDU, SOHU,GIGM, SINA, LTON, and the new youku and tudou listings of course. But what you and others give me no insight into is WHEN will the PRC govt make VIE illegal. I know that is a god awful stretch to predict but what would you think could instigate the govt to make these structures non grata?

  2. Malcolm,

    I don’t expect the government to do anything so formal as to make VIE structures illegal. They have the flexibility now to pick and choose which firms they wish to enforce against.

    When might VIE become even more risky? As I said in the podcast, if the gov’t decides that the domestic industry doesn’t need foreign investment/expertise anymore. (No guess on when that might be.)

  3. Hi Stan,

    Thanks for this clear description of VIEs. I am a law school student in the U.S., and just spent this past summer at an international law firm in Shanghai learning all about VIEs. This podcast really contributed to my understanding of the structure.

  4. Thanks for the great overview of the VIE structure Nina and Stan!

    Stan’s comment to Malcolm is a reasonable response but one that still does not help me in my own risk analysis. Whilst you provide other thoughts on what would be the end-game for VIEs in China? There must be risk scenarios under which some sort of government pronouncement encourages local nationalistic officials to state these VIE are illegal.