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U.S. SEC warns investors of risks from certain Chinese business entities By Reuters


© Reuters. FILE PHOTO – The U.S. Securities and Exchange Commission’s seal can be seen in Washington D.C. on May 12, 2021. REUTERS/Andrew Kelly/File Photo

WASHINGTON (Reuters) – The U.S. Securities and Exchange Commission (SEC) on Monday issued its latest warning to people looking to invest in Chinese companies listed in the United States.

The SEC issued an investor alert, outlining the risks of investing in U.S.-listed entities that have agreements with, but not control over, a Chinese entity known as a variable income entity (VIE). This is the latest move of the SEC to address concern that Chinese businesses are not adhering to U.S. market access rules.

In July, the agency said it will not allow Chinese companies to raise money in the United States unless they fully explain their legal structures and disclose the risk of Beijing interfering in their business. The agency introduced a new law earlier this year that targets China. It would prohibit foreign companies from listing on U.S. stock markets if they fail to comply with U.S. auditoring standards.

These U.S.-listed firms often have a China-based subsidiary that is able to contract with China-based VIEs, according to the SEC. Contracts can contain powers of attorney and equity pledge agreements as well as exclusive services and business cooperation agreements.

According to the SEC, VIE structures are often used due to Beijing’s restriction on non-Chinese ownership in companies in important industries in China. The firms selling shares to U.S. shareholders is a way to raise capital and not distribute ownership to those investors.

Investors are at risk of being held liable if Beijing finds them in violation of Chinese law. They may also be subject to Chinese jurisdiction when enforcing contracts. Conflicts of interest may affect owners and shareholders of U.S. entities.

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