Silicon Valley Legal Bible（16）The History of Chinese Companies' IPO Locations；The Main Positions for Future IPOs

In the last issue, I gave you a preliminary introduction to the VIE structure that has become a thing of the past and the Zoom structure that is now coming into its own, and you kind of started to start soul-searching, since the VIE is not a normal company structure, then why did it appear at that time? And why did the VIE structure, which was once the most sought-after structure by everyone, suddenly become the one that everyone was afraid to avoid? Today, let's consider the reasons for this phenomenon in the nearly 20-year history of China's IPO site selection.

The Silicon Valley Book of Forty-Two Chapters, a legal encyclopaedia tailored for founders. I am Liu Xiaoxiao, a U.S. attorney, and I am here in Silicon Valley to provide you with an in-depth explanation of the legal logic behind entrepreneurship.

1.The past 20 years - VIE to the U.S. listing in vogue

Around 2000, the era of the Internet boom, Internet companies such as Tencent, Alibaba, Meituan, Baidu, Jingdong, Pinduoduo, Netease, etc. were basically listed overseas, with the United States as the main market. The VIE structure was also born at this time. In short, the VIE structure is designed to allow companies that operate in China to go public in the United States and earn money from the U.S. capital market without having to actually set foot on the U.S. map. So what were the reasons for such a listing trend at the time?

1.1 Source of Funds

In the early days of China's Internet development, people still had no idea when a new industry like Internet companies could make money, so the few RMB funds that existed were obviously reluctant to invest money in industries that only seemed to burn money. Comparatively speaking, the US dollar funds, which had already made great returns on Internet ventures in the US, looked to China, which had a good talent base and potential for technological development, after the US Internet industry had already been overvalued. Legend has it that in Beijing in 1999, a group of US dollar fund investors squatted downstairs in several large Internet companies, and once they saw IT guys wearing glasses, plaid shirts, jeans and trainers, they went up to them and asked, "Do you want to start a business? This kind of capital drive basically determines that the exit channel for Chinese Internet company start-ups is overseas, to be exact, in the United States.

1.2 Listing Criteria

China's A-share listing standards include the requirement of three consecutive years of profitability. Internet companies, which are a new type of industry, are often loss-making until the time of IPO, so how can they meet the three-year profit requirement. Moreover, China's listing system is based on an approval system, while the U.S. has a registration system. In contrast, the listing standards of the United States are much friendlier to Internet companies than China.

1.3 Foreign Capital Factor

China's technology, media and communications (TMT, Technology, Media, Telecom) industry is restricted to foreign investment. Taking a US dollar fund means that there are foreign shareholders in the company, and it is not possible to be listed on the A-share market.

1.4 U.S. Leadership

The world's top Internet companies, such as Amazon, Google and Microsoft, were all born in the United States. This has also become a role model for the budding Internet companies in China, and "going public in the U.S." and "ringing the bell on NASDAQ" have become the dreams of Chinese Internet company founders.

2. Today is not the same as in the past - VIE to the U.S. listing is a difficult task

But why is the VIE structure, which was once so popular, being shunned by everyone today?

2.1 Restrictions of China's Policy

The main operating body of VIE structure is in China, but the main listing body is outside China, so it becomes "blossoms inside the wall, results outside the wall". This has caused China's stock market to miss out on the highest return on investment over the past 20 years, and China will obviously introduce policies to restrict this model.

2.2 Changes in US-China Diplomatic Relations

Companies under the VIE structure are collectively referred to as Chinese stocks, which was originally not a regular mode of building corporate structures, and was an opening released by the US SEC to Chinese internet companies. When the diplomatic relations between the United States and China deteriorated, the SEC closed this opening and did not allow Chinese companies to go public in the United States, and the Foreign Corporation Accountability Act began to request audit drafts from Chinese companies, which they obviously could not get out. That's why Chinese stocks are falling en masse starting in 2021.

2.3 National Security Issues

Just now we said that VIE structure is a wall of flowers, wall results, operating in China, earnings in the U.S., which allows the U.S. in the economy to earn a cheap, but after all, these enterprises are rooted in the soil of China, or the West will let them be afraid of the "Chinese genes", meet the year of national security is more important than the economic gains! In the years when national security is more important than economic gains, such a "take the inside out" model of corporate structure is obviously "not a person inside or outside".

In this way, Hong Kong, Cayman, Viking these roads can no longer go.

3. The next 20 years - return to the A shares, spin-off listing

So in this form, the Chinese enterprises listed on the site where the road?

3.1 Return to A-shares

The first way is to return to A-shares.

In the U.S. Securities and Exchange Commission to treat Chinese stocks policy tightened, when the U.S. listing no door. Gradual reform of the domestic capital market, the A-share began to embrace Internet companies, lower the threshold for listing, the registration system began to be implemented, more and more Internet companies choose to list on the local market. Then the existing U.S. stock market, a large number of Chinese stocks suppressed by U.S. policy may choose to privatise and delist, return to A shares.

The total number of listed companies in the A-share market was 3,000 in 2016, 4,000 in 2020, and 5,000 in 2022, indicating that the CSRC is relaxing the audit thresholds with great vigour and embracing the return of A-share-listed companies.

3.2 Going overseas completely

The second way is to go overseas completely. What does it mean to go overseas completely? If your company's main market is overseas, then you need to directly move the core team and physical operations overseas, not remotely, that is, like the Zoom structure, and listed in the United States in such a way.

3.3 Spin-off listing

For companies with large volume and coexisting domestic and overseas business, they will often adopt business spin-off and list separately in different places.

These two issues said a lot of theory, the next few issues we will use some of today's multinational companies in the actual case, see how they are doing.

The Silicon Valley Treasure Book of Forty-Two Chapters, a legal encyclopaedia tailored for founders. I'm Xiaoxiao Liu, a U.S. attorney.