he Chinese/U.S. IPO Conversation
When you buy a stock, you become a partial owner of the business. With a large enough position, you might even control enough stock to influence the direction of the company. For the bulk of investors, influence only happens in the event that you and other shareholders with similar interests become organized. However, with dual class shareholder structures and special legal entities, you could be buying a piece of paper with very few or unenforceable legal rights. Let's take a moment to talk about corporate structure and how it can impact shareholder rights.
Variable Interest Entity (VIE) – The Connection Between Chinese and U.S. Markets
The variable interest entity (VIE) corporate structure was originally introduced into the U.S. by Chinese companies. Because foreign ownership in certain Chinese industries is heavily regulated and, in many cases, either prohibited or severely limited, the VIE structure was introduced as a way for companies within those industries to be listed on overseas exchanges.
Essentially, VIEs offer their shareholders an indirect stake in the earnings and revenue generated by a company without actually offering them a claim to the company's assets. From a U.S. shareholder perspective, the VIE which you own through your purchase of stock does not necessarily have legal ownership of the operating assets. Instead, the VIE has legal contracts with the foreign business in control of the operating assets that are intended to redirect profits from the foreign business to shareholders in the United States.
The Chinese Government's Take
While VIEs have been around for decades, the Chinese government has never taken an official stance on their existence. Although there have been rumors that China's governing body is evaluating the use of VIEs, the general consensus is that China is unlikely to restrict existing VIEs while there are so many of them.
What Does This Mean for Chinese Company IPOs?
First and foremost, every company is different and it's important to research companies you're considering before you invest in them. When you decide to make an investment make sure the company you choose fits into your risk tolerance and your trading plan.
With that in mind, here are some things to think about when evaluating a company with a VIE corporate structure and IPOs in general:
Foreign Market Exposure –China has one of the largest economies in the world. The VIE structure offers a way for U.S. traders to access Chinese markets, but before you invest, make sure you think about how this type of corporate structure fits into your strategy.
Impact to Your Portfolio Composition – It's important to think about how any new investment impacts the overall composition of your portfolio. If you're planning to invest in a Chinese company, how will that investment impact your portfolio's ratio of domestic to foreign equities? Are you comfortable with that new ratio? Are you still diversified according to your risk tolerance?
Historical IPO Trends – Before IPOs begin trading on the secondary market, shares are typically purchased by large institutions. Those large institutions may choose to distribute shares to some of their large clients. If an IPO has a lot of "hype" behind it, once the IPO begins trading on the secondary market it has the chance to rapidly increase in price (if investor appetite is high enough). When this happens, there's the possibility that shareholders who purchased shares at the IPO price prior to trading on the secondary market could sell their position to take quick profits. This selloff may cause the share value to decline as sellers impact the share price.
Your Personal Strategy as it Relates to IPOs: Try to read through the hype and evaluate the underlying characteristics of the company you're investing in. Are you comfortable with the company? Do you believe the company's shares will be a suitable fit after any hype around the IPO dies down?
Next Steps: Before you invest in any company, it's essential that you research the company thoroughly. For new companies preparing to release their IPO, it may be a good idea to take a look at the company's SEC filing as well as keep an eye on the latest news stories. Log in to research now.
This article is for information purposes only and their use of a specific strategy does not guarantee a profit. None of the information provided should be considered a recommendation or endorsement of any specific investment, tool or strategy. The choice to engage in a specific investment, tool or strategy should be based solely on your research and evaluation of risks involved, your financial circumstances and investment objectives. Securities are subject to market fluctuation and may lose value. Market volatility, volume, and system availability may impact account access and trade executio
When you buy a stock, you become a partial owner of the business. With a large enough position, you might even control enough stock to influence the direction of the company. For the bulk of investors, influence only happens in the event that you and other shareholders with similar interests become organized. However, with dual class shareholder structures and special legal entities, you could be buying a piece of paper with very few or unenforceable legal rights. Let's take a moment to talk about corporate structure and how it can impact shareholder rights.
Variable Interest Entity (VIE) – The Connection Between Chinese and U.S. Markets
The variable interest entity (VIE) corporate structure was originally introduced into the U.S. by Chinese companies. Because foreign ownership in certain Chinese industries is heavily regulated and, in many cases, either prohibited or severely limited, the VIE structure was introduced as a way for companies within those industries to be listed on overseas exchanges.
Essentially, VIEs offer their shareholders an indirect stake in the earnings and revenue generated by a company without actually offering them a claim to the company's assets. From a U.S. shareholder perspective, the VIE which you own through your purchase of stock does not necessarily have legal ownership of the operating assets. Instead, the VIE has legal contracts with the foreign business in control of the operating assets that are intended to redirect profits from the foreign business to shareholders in the United States.
The Chinese Government's Take
While VIEs have been around for decades, the Chinese government has never taken an official stance on their existence. Although there have been rumors that China's governing body is evaluating the use of VIEs, the general consensus is that China is unlikely to restrict existing VIEs while there are so many of them.
What Does This Mean for Chinese Company IPOs?
First and foremost, every company is different and it's important to research companies you're considering before you invest in them. When you decide to make an investment make sure the company you choose fits into your risk tolerance and your trading plan.
With that in mind, here are some things to think about when evaluating a company with a VIE corporate structure and IPOs in general:
Foreign Market Exposure –China has one of the largest economies in the world. The VIE structure offers a way for U.S. traders to access Chinese markets, but before you invest, make sure you think about how this type of corporate structure fits into your strategy.
Impact to Your Portfolio Composition – It's important to think about how any new investment impacts the overall composition of your portfolio. If you're planning to invest in a Chinese company, how will that investment impact your portfolio's ratio of domestic to foreign equities? Are you comfortable with that new ratio? Are you still diversified according to your risk tolerance?
Historical IPO Trends – Before IPOs begin trading on the secondary market, shares are typically purchased by large institutions. Those large institutions may choose to distribute shares to some of their large clients. If an IPO has a lot of "hype" behind it, once the IPO begins trading on the secondary market it has the chance to rapidly increase in price (if investor appetite is high enough). When this happens, there's the possibility that shareholders who purchased shares at the IPO price prior to trading on the secondary market could sell their position to take quick profits. This selloff may cause the share value to decline as sellers impact the share price.
Your Personal Strategy as it Relates to IPOs: Try to read through the hype and evaluate the underlying characteristics of the company you're investing in. Are you comfortable with the company? Do you believe the company's shares will be a suitable fit after any hype around the IPO dies down?
Next Steps: Before you invest in any company, it's essential that you research the company thoroughly. For new companies preparing to release their IPO, it may be a good idea to take a look at the company's SEC filing as well as keep an eye on the latest news stories. Log in to research now.
This article is for information purposes only and their use of a specific strategy does not guarantee a profit. None of the information provided should be considered a recommendation or endorsement of any specific investment, tool or strategy. The choice to engage in a specific investment, tool or strategy should be based solely on your research and evaluation of risks involved, your financial circumstances and investment objectives. Securities are subject to market fluctuation and may lose value. Market volatility, volume, and system availability may impact account access and trade executio
