US SEC Warns Investors About Risks Associated With Certain Chinese Business Entities
WASHINGTON, Sept. 20 (Reuters) – The United States Securities and Exchange Commission (SEC) issued its latest warning on Monday to those seeking to invest in Chinese companies listed in the United States.
In an investor alert, the SEC detailed the potential risks of investing in companies listed in the United States that have contracts with but without control over a Chinese entity, known as a variable interest entity ( LIFE). This is the agency’s most recent move to address concerns that Chinese companies are flouting US market access rules.
In July, the agency said it would not allow Chinese companies to raise funds in the United States unless they fully explain their legal structures and disclose the risk of Beijing interfering in their business. Earlier this year, the agency began rolling out a new law, aimed at China, that would kick foreign companies off U.S. stock exchanges if they fail to comply with U.S. auditing standards.
According to the SEC, these companies listed in the United States often have a subsidiary in China that was formed to enter into contractual agreements with the China-based VIE. Contracts can include powers of attorney, equity pledge agreements and exclusive services or business cooperation agreements.
The VIE structure is typically used because of restrictions Beijing places on non-Chinese ownership of companies in key industries in China, the SEC said. By selling stocks to US investors, companies raise capital from US investors without distributing ownership of those companies to them.
The SEC has warned investors that they are at risk if Beijing determines that they violate Chinese law, may be subject to Chinese jurisdiction for the performance of any contract, and may be affected by conflicts of interest between the owners of the entity and the US shareholders.
Reporting by Chris Prentice; Editing by Aurora Ellis
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