Rule change threatens overseas fundraising ability

China’s securities regulator has asked senior government officials to begin cracking down on a controversial corporate structure used by companies like Sina (SINA.NASDAQ) and Baidu (BIDU.NASDAQ) to list overseas, Reuters reported, quoting lawyers at four different firms in China and Hong Kong. The notice, sent by the China Securities Regulatory Commission (CSRC), asked China’s State Council to take action against structures known as Variable Interest Entities (VIEs), which are used heavily in the private equity market. The CSRC did not respond to requests to confirm whether it had sent the notice. “If this structure is prohibited, you’re going to see a shrinkage on a massive scale in terms of the number of potential foreign investors in China,” said one lawyer at a foreign law firm in China. The new regulations are not expected to force existing VIEs to dismantle, but all new variable interest entities will require approval from the Ministry of Commerce.