Chinese regulatory risk casts a shadow over Tencent Music

Tencent Music VIE structure risks - article

In Tencent’s case, it contracts with a company called Guangzhou Kugo which owns 100% of a company called Tencent Music Shenzhen. TMS operates the QQ Music and WeSing platforms, but has not yet applied to obtain the appropriate license for the business, the company said in its filing posted Tuesday on the U.S. Securities and Exchange Commission website. “We cannot assure you that it can successfully obtain these licenses in a timely manner, or at all,” the statement reads.

“A lot of US-listed Chinese companies operate through VIEs. Their reading is that if Beijing did not say it is illegal, then it is legal. However, Chinese regulators do have the ground to go after them,”

The prospectus also revealed the extent to which Tencent Music relies on VIEs to operate its business, and it set out the group’s recent financial performance for the first time. Tencent Music reported a $230 million profit on revenue of $1.3 billion for the six months ended June 30 the filing stated. “The revenues contributed by our VIEs and their subsidiaries constituted substantially all of our revenues in 2016 and 2017 and the first half of 2018,” the company said.


Alibaba’s Jack Ma is giving up ownership of Chinese entities

Jack Ma is giving up ownership of VIEs & what it means, highlights from the SCMP article

In a securities filing in July, Alibaba Group disclosed that executive chairman Jack Ma will be stepping away from the company’s variable interest entities. This was disclosed about a month before Ma announced a succession plan with a transition period of a year.

“We are in the process of enhancing the structure we use to hold our variable interest entities so that we can better ensure the stability and proper governance,” Alibaba said in the filing, adding that the new VIE structure will “reduce key man risks”.

The investment holding company that will gain ownership of the VIEs is owned by two partnerships, each of which hold 50 per cent equity of the holding company. One partnership is a company formed by several members of the Alibaba Partnership and management, while the other partnership is comprised of the same group of people who will serve as limited partners.


Chinese Depository Receipts (CDR) launch

Highlights of the SCMP article

  • Qualification to list a-shares

    The State Council said qualified innovative companies with valuations of no less than 20 billion yuan (US$3.2 billion) and annual revenue of at least 3 billion yuan could embark on the CDR system to either float additional shares, or launch initial public offerings on the A-share market.

  • Potential companies

    About 30 “unicorns” – unlisted companies valued at more than US$1 billion – and Chinese internet giants that are already traded on equity markets abroad will be eligible for issuing CDR shares.

    Last week, a joint study issued by a Ministry of Science and Technology affiliate and a Beijing-based consultancy published a list of China’s 164 unicorns, which are worth a combined US$628.4 billion.

  • VIEs - this kind of validates the VIE structure

    The proceeds that companies net from CDR issuances can be transferred abroad, but the companies must be registered with the China Securities Depository and Clearing Corporation, according to the guidelines.


Analysis of the VIE model from a legal perspective

An excellent article on Vantage Asia (China Business Law Journal) this morning about VIEs and their legal impacts. Key highlights are -

..often referred to as the “agreement control model” in China, in offshore listings means that a listed entity registered abroad is separate from a domestic business operating entity but the domestic business entity is controlled by the offshore listed entity by way of agreements. The business entity is the VIE of the listed entity.

According to incomplete statistics, among the Chinese enterprises listed on the three major US stock exchanges (the New York Stock Exchange, NASDAQ and the American Stock Exchange), 42% of them have adopted the agreement control model.

Potential issues for the education companies (EDU, TEDU, REDU, DL, COE, HLG etc.) using VIEs to list themselves in foreign markets -

Furthermore, the Supreme People’s Court expressly pointed out in the Ambow Case, “the possible entry of a foreign investor into the compulsory education sector in a disguised manner, and its involvement in the management of the school through control of the founder of the school, should be regulated and, through administrative law enforcement, penalties should be imposed for violation of the law”. In this respect, it issued a judicial recommendation to the Ministry of Education.

Possible conclusions for the VIE situations by the author -

Firstly, stop with the delusions, gambling that the government will continue to look the other way and the VIE model can still be used to circumvent the restrictions on foreign investment in laws and regulations.

Secondly, there is also no need to worry about the sky falling in, as the three methods mentioned in the Draft Law on Foreign Investment leave those enterprises that have used the VIE model and whose actual controller is a Chinese investor room for manoeuvre.

Thirdly, attention needs to be given to the negative list for access by foreign investors. For example, against the background of the relaxation of the restrictions on foreign investment in online data processing and e-commerce business in the Shanghai Free Trade Zone, there is absolutely no need to bring up the VIE model.

Article sums it up with this -

“What we really need to get rid of is not VIE itself, but the cause that gave rise to VIE.”

You can find the entire article here


Amazon is selling physical assets to comply with the Chinese Law

There was a news about Amazon selling off their cloud assets in China to theri partner Sinnet - As per TechCrunch, Amazon did provide a clarification on this -

No, AWS did not sell its business in China and remains fully committed to ensuring Chinese customers continue to receive AWS’s industry leading cloud services. Chinese law forbids non-Chinese companies from owning or operating certain technology for the provision of cloud services. As a result, in order to comply with Chinese law, AWS sold certain physical infrastructure assets to Sinnet, its longtime Chinese partner and AWS seller-of-record for its AWS China (Beijing) Region. AWS continues to own the intellectual property for AWS Services worldwide. ‎We’re excited about the significant business we have in China and its growth potential over the next number of years.

Looks like the primary reason for this is due to the requirement for ICP licenses to operate any website. As a foreign company, Amazon cannot get the IDC/ICP license to operate in china - this is clearly highlighted on their website

ICP in China In accordance with Chinese law and regulations, the State subjects non-commercial internet information services to a record-filing system and commercial internet information services to a permit system. No one may engage in the provision of internet information services without having carried out record-filing procedures or obtained permission. If you use AWS China (Beijing) Region to host a website providing non-commercial Internet information services, you must undertake filing procedures for this non-commercial website (an “ICP Recordal”).

Sinnet, as the operator of AWS China (Beijing) Region, is also the IDC-licensed provider responsible for supporting and verifying ICP Recordal and ICP License for AWS China (Beijing) Region customers. Please click this link for downloading ICP recordal and ICP license introduction. To learn more information, please refer to Sinnet website

In order to use AWS in China, you need to get a separate AWS China account, the global account will not work in China.

Customers who wish to use AWS resources in China (Beijing) Region operated by Sinnet are required to create an AWS (China) Account, a set of credentials that are distinct and separate from other global AWS Accounts. Only customers with an AWS (China) Account will be able to use resources in the AWS China (Beijing) region operated by Sinnet. All customers who wish to use other global AWS regions outside of China will need to create a global AWS Account by visiting

From Amazon’s FAQ section

Q: What are the requirements to register for a China (Beijing) region account? According to Chinese laws and regulators, we need to verify your identity before allowing access to China (Beijing) region. Companies that want to register for a China (Beijing) region account need to provide [1] a valid Chinese business license issued by the Bureau of Industry and Commerce, [2] valid contact information. Once you have completed the registration form, a representative will contact you to follow-up on the registration process.

Q: Can I use my existing AWS Inc. Account to access the China (Beijing) Region? Customers who wish to use the new Beijing Region are required to sign up for a separate set of account credentials unique to the Beijing Region. Customers with existing AWS credentials will not be able to access resources in the Beijing Region.