Financial Services Subcommittee Questions Experts On China-Based Issuers

The U.S. House Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets considered oversight and disclosure legislation concerning China-based corporate issuers.

In the Majority Memorandum, staff described the use of variable interest entity structures by China-based companies. Staff explained that the VIE structure involves the creation of an offshore shell company that enters into contractual arrangements with a China-based operating company with which it shares a name. This creates the impression that the China-based company and shell company are the same firm. The shell company issues stock to public shareholders. However, the shell company is connected to the China-based operating company only through the contractual agreements. Subcommittee staff estimated that two thirds of U.S.-listed China-based companies use a VIE structure, potentially misleading U.S. investors who think they are investing in the operating