The case presents an investment opportunity in a Chinese technology company by using a variable interest entity (VIE). Since foreign ownership is restricted in certain sectors of the Chinese economy, like technology, a VIE can be used to structure around such regulations. VIEs are complex arrangements that rely on an intricate network of contractual relationships that have been designed to mitigate, but cannot eliminate the risk of investing without becoming a shareholder of the investment target. As almost all Chinese technology companies that are listed on exchanges outside of China use a VIE structure, it is important to understand the possible risks associated with investing via a VIE. Examples such as Alibaba are used to illustrate the risks related to using a VIE to access Chinese investment opportunities.
Understanding the concept and historical origin of Variable Interest Entities in the United States and their use for investment purposes in the PRC; familiarity with the level of investment through VIEs in the PRC and the sectors involved; understanding of risks associated with the VIE structure and possible approaches to their quantification and mitigation.