25 June 2013

Lawyers warn investors of risky Chinese IPOs

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

By James Barnes

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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