Caixin Explains: Why China Is Cooling on VIE Structures

1. For over two decades, China's tech startups used the variable interest entity (VIE) structure to access global capital despite foreign investment restrictions; now AI unicorns like StepFun and Moonshot AI, using red-chip VIEs, are considering unwinding them amid regulatory shifts [para. 1][para. 2].

2. This change may end the VIE era, pioneered in 2000 by Sina for U.S. listings, which enabled giants like Alibaba and Tencent to list offshore via contractual control in restricted sectors; regulators now prioritize transparency, data security, and domestic control [para. 3].

3. Manycore Tech's April 17 Hong Kong debut, with shares surging 144%, highlighted urgency; it was the only VIE firm approved for offshore listing in 2026 so far, after CSRC notice in February, but the window seems closed post-mid-March rumors of VIE dismantling as a prerequisite [para. 4][para. 5].

4. From mid-March to mid-April, CSRC accepted seven red-chip offshore listing applications, none with VIEs; CSRC denied a blanket ban but approvals suggest otherwise [para. 6].

5. Red-chip structures, from 1990s state firms in Hong Kong, involve offshore holdings (e.g., Cayman Islands) for direct equity in open sectors or VIE contracts in restricted ones like internet and gaming; VIEs enabled USD VC exits, dual-class shares, stock incentives, and tax efficiency [para. 7][para. 8][para. 9][para. 10][para. 11].

6. Regulators' wariness grew: U.S. concerns over investors holding Cayman shells not actual equity, prompting senator letters and risk disclosures [para. 13][para. 14]; China worries about circumventing restrictions, offshore profits with onshore data, dispute complexities, and new 2023 filing rules treating China-heavy firms as domestic [para. 15][para. 16].

7. No VIE ban: CSRC refuted March 17 Bloomberg report, stressing scrutiny on opacity since 2023 rules; mid-March to mid-April's seven approvals used direct equity; post-2023, only 6% (28/470) offshore listings were VIEs, with longer approvals (475 vs. 252/190 days); no new VIE notices post-Manycore, 257 pending including VIEs [para. 17][para. 18][para. 19][para. 20][para. 21][para. 22].

8. AI startups adapt: StepFun converted to domestic joint-stock April 3 for Hong Kong listing, easing state investor compliance; Moonshot AI's path is tougher with $2.2B from Alibaba/Tencent offshore, in generative AI gray area [para. 23][para. 24][para. 25][para. 26].

9. Unwinding VIEs delays IPOs 6-12 months via restructurings, forex, stock plans; taxes include 10% withholding, possible 10% indirect transfer, 20% founder income; fund repatriation needs circular deals or bridges, exposing past gaps [para. 27][para. 28][para. 29][para. 30].

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