Understanding The VIE Structure: Necessary Elements For Success And The Legal Risks Involved

Introduction

The "variable interest entity" structure (the "VIE Structure") has been the investment structure of choice for foreign investors to navigate through the grey areas of PRC law on foreign direct investment ("FDI") for over a decade. The VIE Structure was first made famous by Sina.com in its 2000 listing on NASDAQ as a workaround structure in the value-added telecom services sector ("Class II Telecommunications Services"),¹ where FDI is subject to substantial PRC regulatory restrictions. Since then, foreign investors have replicated the VIE Structure in many other sectors of China's economy where FDI is either restricted or prohibited under PRC law.²

The VIE Structure has once again come into the spotlight with recent headlines such as the Alibaba-Yahoo dispute, the GigaMedia vs. Wang Ji case, and Buddha Steel's unexpected U.S. IPO withdrawal. Foreign investors have become increasingly apprehensive over the presence of any underlying defects in their