An examination of joint venture models in offshore listing

The offshore listing of Chinese enterprises falls into two categories – direct listing, and indirect listing (in which an outbound company is used as a listing vehicle to control a domestic company, also known as red-chip listing).

Direct listing means an enterprise directly applies to foreign securities authorities for issuance of stock in the name of a domestic quasi-listing company and then applies to local stock exchanges for being listed and traded on stock markets, and is commonly referred to as H stock, N stock, S stock or others. Direct listing has a safe and relatively simple path, with advantages that it can directly enter into foreign capital markets, cut the cost of information transmission, help enterprises obtain massive amounts of foreign capital, and has a relatively good international reputation.

Higher financial threshold

However, direct listing presents an enterprise with the differences between outbound and inbound laws, as well as different requirements on corporate governance, stock issuance and trades. More importantly, offshore listing has a higher financial threshold and longer approval time, which excludes many private enterprises, including high-tech enterprises.

Red-chip listing means an enterprise creates a shell company through an offshore structuring mechanism that gradually controls its domestic assets and forms a structure where an offshore shell company controls a domestic company. However, based on specific cases, hesitation or ambiguity of management institutions in designing rules leads to variations of the offshore listing structure, which can be generally divided into three models: variable interest entity (VIE); joint venture (JV); and slow walk approach.

If a prospective listing enterprise is not big in size but desires a quick listing, the JV structure is a noteworthy model.