#China #StocksInFocus #Financial #SCAM ?
The US Securities and Exchange Commission has clearly drawn attention to the legal risks that investors run when buying so-called ADRs or American Depositary Shares on Wall Street.
The US Securities and Exchange Commission has clearly drawn attention to the legal risks that investors run when buying so-called ADRs or American Depositary Shares on Wall Street.
After all, these are merely certificates with limited rights of access issued by an American bank - and not shares.
The ADRs are based on a structure called VIE or Variable Interest Entity. This is interposed because, according to Chinese law, foreigners are not allowed to directly own shares in Chinese companies in most sectors.
So the VIE structure was basically designed to circumvent Chinese law. This structure has been around for decades and was used on a larger scale from 2000 onwards to "securitise" Chinese shares on Wall Street.
Because when China's growth engine really took off, fast-growing Chinese companies looked longingly at the cheap capital available in the US and naturally wanted to access it.
They ignored the occasional scams and, above all, the fine print. And yet this has a lot to offer.
After all, the VIE structures first came to light in connection with the bankruptcy of the fraudulent energy trading company Enron, which used them to disguise the assets and liabilities on its balance sheet.
With regard to Chinese companies, the VIE tricks Chinese regulators into believing that the company in question is wholly owned by Chinese nationals. At the same time, it gives Western owners the impression that they are legal shareholders of a Chinese company.
This works as follows: A Chinese company, such as Alibaba, sets up a Cayman-based shell company with no real business, no office and no employees, which is also called Alibaba on paper.
Once the Alibaba copy is established, the parent Alibaba drafts a complex web of legal agreements designed to give the legal corporate copy a claim on the profits and control over the assets owned by Alibaba in China.
The Alibaba copy in the Cayman Islands now owns these contracts and agreements as its only asset, but registers as a company on the New York Stock Exchange on this basis and sells share certificates to investors under the name Alibaba.
The Wall Street banks earn millions of dollars in fees when issuing the Alibaba copy, while the international investors spend billions on buying these strange securities.
In fact, they then own neither a share in a Chinese company, nor do they have any enforceable right to its profits or actual control over its assets.
The bottom line is that the Alibaba copy in the Cayman Islands is just a dummy company with no real assets and no business.
A share or share certificate certifies ownership of a part of a business. In other words, it evidence of a right proprietary interest in company assets.
In contrast, a VIE share (often incorrectly called a stock) certifies ownership of a contractual right to a percentage of the company's profits.
Unlike a traditional share certificate, the VIE share provides legal title to the assets of a completely separate company (sometimes referred to as a shell company
BABA shareholders have no ownership rights in the assets of the China-registered Alibaba company; they only indirectly share in the company's profits.
Unlike other companies listed on US exchanges, Chinese companies do not undergo public scrutiny by US regulators." Atkinson suggested that future listings of Chinese companies should be banned and existing ones delisted.
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