In Depth: China’s Scrutiny of Offshore Listing Structure Clouds AI Firms’ IPO Paths

1. Chinese regulators' increased scrutiny of offshore structures is hindering Hong Kong listings for Chinese firms, especially AI startups like StepFun and Moonshot AI, who must decide whether to keep or dismantle costly VIE structures amid uncertain CSRC approvals [para. 1][para. 2]. This shift coincides with a boom in Hong Kong IPOs driven by AI companies, following strong debuts by Zhipu AI and MiniMax (which used a Cayman VIE) [para. 7].

2. A VIE structure enables red-chip listings by bypassing foreign investment restrictions in sectors like internet and telecom; it involves offshore entities (often Cayman Islands) controlling onshore operations via contracts, not ownership [para. 3].

3. Though not formally banned, VIEs face heightened pressure: recent filings show they've vanished from the pipeline, with only Manycore Tech Inc. approved by CSRC on Feb. 12 and listing in Hong Kong on Friday; no other VIE approvals or applications in over two months [para. 4][para. 5]. Since the registration-based IPO regime began over three years ago, of 470 filings by April 17, just 28 (6%) were VIE-structured, indicating the slowest approval path [para. 6].

4. Companies face a dilemma: retaining VIEs requires proving necessity to CSRC, while unwinding is expensive and time-consuming [para. 8]. StepFun acted first, converting its Shanghai entity to a joint-stock company on April 3, seen as prep for direct H-share listing and likely VIE termination to suit regulators; it aims for year-end IPO despite no comment [para. 9][para. 10][para. 11].

5. StepFun's backers—state-linked funds, Shanghai investors, China Life PE, Tencent, Qiming, 5Y Capital, Pudong VC—make VIE problematic: state shareholders face outbound investment approvals and asset procedures; regulators question offshore need with heavy domestic capital [para. 12][para. 13][para. 14][para. 15]. Direct H-shares clarify control, trace ownership, and streamline filings [para. 16][para. 17].

6. Moonshot AI deliberates VIE dismantling per Reuters; it warned of fake pre-IPO ads [para. 18][para. 19][para. 20]. Restructuring is tougher: founder Yang Zhilin owns 78.968% onshore; offshore, $2.2B raised from Alibaba, Tencent, HongShan, Xiaohongshu, Meituan via SPVs, requiring complex renegotiations on exits, redemptions, and options [para. 21][para. 22].

7. Retaining VIEs is tricky too, as LLMs face data security, privacy, algorithm, and AI registration rules, creating foreign investment gray areas [para. 23]. Full dismantling takes 6-12 months plus reviews, delaying IPOs [para. 24]. King & Wood Mallesons advises AI firms not to rush changes but align structures with business, data flows, tech exports, security, compliance, and sustainability amid evolving oversight [para. 25][para. 26][para. 27].

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