One topic that can’t be done in China is the VIE. VIE was originally a financial term, called variable interest entity, which means that there is no controlling relationship between the listed company and the actual operating company, but the agreement control relationship, through the provisions of a paper agreement, the consolidation of financial reports. It is said that Company A does not actually hold the equity of Company B, but A/B Company has signed an agreement stipulating that all interests of Company B are owned by Company A. Due to well-known reasons, the domestic Internet is very unfriendly to foreign capital. Basically, the license qualifications required to operate the Internet are not allowed to be held by foreign companies. But the Internet is an investment-intensive industry. Most of the investment comes from US dollar funds. The US dollar fund is a typical foreign fund. Investors will require the invested company to establish a foreign company for future exit channels: such as offshore IPO. Unfortunately, once this is done, it will not be able to meet the requirements of domestic laws and regulations for Internet companies. So smart, like Sina, cleverly use the VIE structure, allowing listed companies (and their affiliates) to agree to control the actual operation of domestic companies, to achieve NASDAQ listing (investor exit) and operations in mainland China (acquiring relevant qualifications and licenses) A state that has both a paw and a paw.
Since Sina, the Chinese Internet companies that invested in US dollar funds have to do such a structure. It can be said that the prosperity of the Chinese Internet cannot be separated from the VIE. Internet companies that you can name are almost all operating under this system.
Of course, this is a distorted organizational structure, to some extent a gray area of domestic law (the state does not explicitly support or oppose this structure) – if there is no contractual spirit, the legal person of company B (operating entity) tears up Agreement, Company A (listed entity) has almost no room for manoeuvre. This topic will not be discussed. Interested in google “Alipay Incident”.
After receiving a $500,000 investment from Angels, the Tucom Circle had to make a complex VIE structure. As mentioned above, one will prepare a corporate governance structure for investors to withdraw, and secondly, it will facilitate the entry and exit of funds in the future. This VIE structure, including the registration of the No. 75 approval for foreign exchange management, almost broke our cash flow.
A VIE structure is generally done this way:
(1) The founder (management team) of the company sets up an offshore company. The BVI companies we often hear are offshore companies established in the British Virgin Islands. The benefits of BVI companies are that they do not pay taxes, have no exchange controls, protect assets (avoid expropriation and confiscation by foreign governments), and highly protect the privacy of shareholders. Therefore, the general BVI company is used as the holder of the listed entity.
(2) All shareholders of the company jointly establish a company as the main body of the listing. In general, the listed entity will choose the Cayman company. The Cayman company is more regulated and regulated than BVI. The mainstream overseas exchanges, such as the SEC (US Securities and Exchange Commission) and the Hong Kong Stock Exchange, accept the registered companies registered in the Cayman Islands, so the general listing entity will choose Cayman. Companies (other options for offshore companies are the Bermuda Islands). Of course, registered US companies, or Hong Kong companies, can also be listed as the main body of the listing, but the legal and financial aspects are much more regulated than offshore financial centers such as Cayman, and there are not too many taxes. Offer.
(3) The main body of the listed company (Cayman Company) has established a shell company with 100% equity in Hong Kong. The advantage of setting up a Hong Kong company is that Hong Kong and the Mainland have tax incentives and can obtain some tax exemptions. Shareholders’ dividends also have a good tax rate for overseas companies. Therefore, Hong Kong companies generally act as the last layer of the overseas structure and directly control the foreign-funded enterprises in the Mainland.
(4) The Hong Kong company has established another domestic and foreign-invested enterprise, which is known as WOFE – actually WFOE (Wholly Foreign Owned Enterprise). The WFOE is a key link, and ultimately the domestic companies (operating entities) within the territory controlled by the WFOE agreement.
(5) WFOE has signed a series of agreements with domestic companies to achieve the purpose of controlling domestic companies.
This structure wraps around and is very dizzy. BVI -> Cayman -> HK -> WFOE -> Domestic companies are a compromise that simultaneously satisfies capital operations and domestic Internet restrictions. The core of this structure is protocol control, so if you do not consider tax avoidance and other conveniences, in fact, the simplest VIE structure can be made: Cayman -> WFOE -> domestic companies. This is what I imagined, and no one is expected to do so.
In July 2012, the Tuco Circle registered its domestic-funded company “Luer Huizhi Technology Co., Ltd.” in Haidian. After the VIE structure, the company was controlled by a WFOE agreement such as “Traveling Circle Co., Ltd.” (probably the name), and then controlled by various shell companies in layers as described above, until Cayman. This seemingly intricate structure is done by the agent, but the process of doing this structure is also indispensable for the labor of the hard work. Alex, Kent and I are the first to do such a thing, so I am very excited. When I ask this question, there seems to be a problem that I can never ask for, and the legal director of the workshop, Mr. Lin, always patiently answers each of us. problem.
VIE is a beautiful, future-oriented structure. But its establishment is very time consuming, especially the handling of the key No. 75 document. We started to set up the VIE structure after getting an investment of 500,000 US dollars in October 2011. By February of the following year, this structure has not been set up yet (the registration of the 75th document has not been completed). The real problem we have is that our cash flow does not support the day when the structure is fully prepared.
Since the company was founded in June 2011, our own RMB 500,000 plus the 150,000 RMB seed investment provided by the factory has been strictly controlled. Even if the three founders have not paid wages to support a small team of a certain size, the cash flow is still quite stretched (know why we are so in favor of interns ^_^). In December of the 12th, we were able to get an angel investment in April, but we couldn’t move the dollar at all; at the same time, our cash flow has been warned. Alex and Kent took another 100,000 yuan as a loan, lending the company to pay the employees’ wages, and I, at home, had no money to lend to the company.
Registration No. 75 is a key part of the establishment of WFOE, and it is also an important step for us to lie in the Cayman company’s account to enter the territory and become RMB, which is for us to spend. I didn’t read this document specifically. At that time, my mind was all invested in product development. From time to time, I needed to sign the documents on the legal side. I also rushed to write the name. So for this document, I only have a vague concept: it is to prevent hot money from flowing into a firewall in the country in the name of investment.
However, this firewall almost killed us. At the end of February 12, after four months of suffering, we finally succeeded in setting up WFOE. In the following weeks, the investment we have been lying for a long time can finally be spent normally! Looking back now, there is a big deal here: Alibaba should open a “Yuebao” business in the Cayman Islands – because there are many examples of large amounts of money lying in the bank for a few months like us. If the annualized rate of return is 6%, the investment income of these four months is considerable.
At the same time, our big revision is coming to an end, everyone is holding their breath and waiting for the day of launch.
(To be continued, continue to be serialized this Friday)
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