Analysis of the VIE model from a legal perspective

The term “VIE (variable interest entity) model”, 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.

The essence of the VIE model is that, despite the absence of an equity relationship between the listed entity and the business operating entity, the listed entity and the business operating entity that is actually controlled by it can be consolidated due to the series of agreements between them. Because the VIE model was originated by Sina, it is also known as the “Sina model”.

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. Internet enterprises have secured foreign capital through the VIE model, thereby promoting the development of domestic internet enterprises. It could be said that were it not for VIE, a bunch of outstanding internet enterprises would have been very unlikely to appear in China. However, on the other hand, the debate on the VIE model continues to rage.