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Frequently Asked Questions
  Does Nasdaq list companies that use a contract-based structure, such as a variable interest entity ("VIE"), to operate some or all of its business(es)?
Identification Number 1116
In certain markets, including China, there are restrictions on ownership of businesses in certain industries by foreign persons. To overcome these restrictions, a company may adopt a corporate structure, such as a VIE, whereby control of the operating company is obtained, not through ownership, but rather through a series of legal agreements between the operating company and the VIE company that is owned by public shareholders. There have been instances in the past where companies using this structure have lost control of their China-based operating companies to the detriment of public shareholders of the VIE entity.

There are no Listing Rules that prohibit listing companies that use such a structure. However, Listing Qualifications will review the disclosures and documents surrounding the company’s corporate structure and agreements and may request additional information or impose additional requirements. In addition, an investor considering investing in such a company may want to consider the company’s disclosures, including risk factors in its prospectus, and understand, among other things:
  • The reasons why the company uses a VIE structure for its business(es);
  • Whether the company has a plan to unwind or dissolve the VIE structure in the future, especially if restrictions on foreign ownership are eased or lifted;
  • Whether there is a legally enforceable power of attorney or similar document that confers upon the company all legal rights of the VIE(s), including the right to all economic benefits and the ability to exercise control over the VIE’s operations, assets and employees;
  • Whether the company has obtained legal opinions from local counsel regarding, among other things: (i) the legality of the VIE structure under applicable law and regulations; (ii) the enforceability of the contractual arrangements that underlie the VIE structure; and (iii) whether the successors or assignees of the VIE’s shareholder(s) are bound by and subject to the VIE contracts;
  • Whether there are any government or regulatory rulings relevant to the use and legality of the company’s VIE structure(s) and whether there are any objections or concerns raised by governmental entities or regulatory authorities regarding the use of a VIE structure;
  • Whether the company has obtained all necessary government and regulatory approvals to operate the VIE business(es); Whether the VIE structure allows the company to consolidate the financial results of the VIE(s) under applicable accounting principles;
  • Whether any of the VIE shareholders are also officers, directors or employees of the company or any subsidiary and, if so, a description of any arrangements or structures to address conflicts of interest that may arise under such circumstances;
  • Whether the company is required to and has the ability to repatriate revenues generated by, or amounts advanced to, the VIE business(es).
Publication Date*: 8/8/2014 Mailto Link Identification Number: 1116
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