Dragon Victory International (LYL) - A case study for VIE?

This can become a classic case study for VIE - Here are some interesting facts -

  • Company uses the VIE structure to avoid the foreign investment restrictions - the VIE, Long Yu, is jointly 100% owned by Mr. Yu Han (then CEO) and Ms. Koulin Han (a majority shareholder)
  • Company derives 100% of the revenue thru their VIE - Long Yu
  • Company went public on NASDAQ markets on October 20, 2017
  • CEO, Mr. Yu Han, resigned on 10/23/2017 due to personal reasons
  • He still owns 62.1% of the outstanding shares (~7.25M out of 11.6M) which is still under 180-day lockup period restriction
  • Key excerpts from the filings

    It is uncertain whether we would be considered as ultimately controlled by Chinese parties. Mr. Yu Han, our chairman and chief executive officer and a PRC citizen, beneficially and indirectly owns 72.5% of our outstanding voting securities. It is uncertain, however, if these factors would be sufficient to give Mr. Yu Han control over us under the draft Foreign Investment Law.

    It is uncertain whether the online crowdfunding industry, in which our variable interest entity operates, will be subject to the foreign investment restrictions or prohibitions set forth in the “negative list” that is to be issued.

    Due to lack of guidance under this draft law, we are unable to ascertain the controlling status of our company although Mr. Yu Han, our chairman and chief executive officer and a PRC citizen, beneficially and indirectly owns 72.5% of our outstanding voting securities before this offering, and we cannot assure you of the controlling status of our company after the completion of this offering.

    Therefore, if we are ultimately considered a foreign invested enterprise deemed to operate in either a “restricted” or “prohibited” industry, we may no longer conduct the business pursuant to a VIE structure and we could be subject to severe penalties or be forced to relinquish our interests in relevant industries, which in turn would materially impact our results of operations, as well as the value of your Ordinary Shares.

Let’s see how this will unfold…

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