Lawyers warn investors of risky Chinese IPOs

By James Barnes

25 June 2013 at 11:31 BST

Legal experts have highlighted the unusual business structure used by many Chinese companies to urge investors to use caution when dipping into the market.

Beijing: questions over Chinese IPOs

IFR Asia reports that the structure - known as a variable interest entity, or VIE - is designed to let companies bypass Chinese government bans on foreign ownership in some business sectors.
A recent example of the VIE structure is the successful $91 million flotation of Light-in-the-Box Holding Co Ltd, which richly rewarded investors with shares up 57 per cent from their IPO price of $9.50.

Legal rights

However, if things were to go wrong foreign investors may have few legal rights.
Jason Flemmons - a former US Securities and Exchange Commission enforcement official, now a senior managing director at FTI Consulting – described the structures as ‘extremely high-risk’. He said: ‘Your lay investor has no idea that this is what they’re invested in. Even though you have agreements … that are supposedly protecting investors, actually exercising those purported rights in the Chinese legal system would be virtually impossible.’


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