Chinese Companies Face Delisting

China has recently asserted more control over private companies in that country. Now, the SEC is threatening to not approve new company listings for companies based in China and possibly delist currently listed NYSE and Nasdaq companies based in China. Most Chinese companies do give direct ownership, but often use the variable interest entity structure (VIE). In a VIE, a shell company is created in a foreign jurisdiction like the Cayman Islands. The shell company has a claim on the profits and assets of the parent company, although whether the claim is enforceable is debatable. As a result, the investment is more like an investment in a company in the Cayman Islands. Since the SEC requires full and fair disclosure, the SEC feels this unusual corporate structure should come with more warnings.