Silicon Valley Legal Bible（15）When Cayman is a thing of the past

In the past, the size of the red chip, now long behind. Ask the entrepreneurs, but the Cayman is still the same. Do you know? Do you know? It should be a Zoom structure.

All entrepreneurs who come to the US to start a business say they want to build a VIE structure, which used to be the required structure for Chinese companies to go public in the US, note the word "used to be". Starting from 2019, all of our major businesses have become VIE structures. It's been 5 years now, and no matter how hard I try, there are still a lot of entrepreneurs who talk about VIEs when they first come to consult with me, as if building a VIE structure makes a company halfway successful. Even after I have talked about Zoom structure for half an hour, the entrepreneurs asked "Where should I put my BVI company?". When I heard that, I thought, "Oh, no, his head is still in Cayman".

What exactly is VIE structure? Why is it so popular for more than 20 years, and why has it fallen from grace? In this issue, we will take a detailed look at the development of VIE structure.

Silicon Valley's 42 chapters, a legal encyclopaedia tailored for founders. I'm Liu Xiaoxiao, a U.S. attorney, and I'm here in Silicon Valley to provide you with an in-depth explanation of the legal logic behind entrepreneurship.

1.VIE structure is not a normal company structure

Before we start to talk about the specific content, we need to understand a problem, VIE structure is not a normal company structure, it is in a special historical period in order to cope with the special national policy and spawned a kind of curve to save the country's strategy, and can't be used as a regular way to build the company.

We've covered this over and over again in many of our previous videos, and here I'll take the structure of Bilibili as an example.

Layer one, the founding team each set up shareholding companies in the British Virgin Islands, the purpose here is to increase confidentiality through this layer of companies, which can be either Cayman or Viking, but Viking is cheaper.

The second level, each Viking shareholding company as shareholders jointly set up a Cayman Islands company, the theory of this layer can also be Cayman, Viking, but this layer can not save money, because the Virgin Islands company is too simple, the mainstream stock exchanges are not recognised by the Viking Islands company as the main body of the listings, so this layer is usually still set up a Cayman company.

The third layer, that is, in the Cayman company and the domestic company in the middle of the Hong Kong company, Hong Kong phantom power limited (HODE HK Limited). Some friends will ask, then what is the role of this Hong Kong company? Mainly because there are tax incentives between the mainland and Hong Kong, play a role in saving tax.

The fourth level, is the domestic part of the phantom power technology Shanghai Limited (Magic Power Technology (Shanghai) Co., Ltd.) is a foreign company set up in the mainland's wholly owned subsidiary (Wholly Owned Foreign Enterprise), is often referred to as WFOE. with this WOFE The actual operating companies that are equal to this WOFE, in the case of Bilibili, are Shanghai Wide Entertainment Digital Technology Co. Co., Ltd.) These two companies do not have any "blood relationship" with the previous string of shareholding structure, they are totally an "adopted son", but they are the main source of income of the entire Bilibili VIE structure. Through the agreement control, all the profits of the two actual operating companies in China will be transferred to the Cayman company. It can be understood that it is the "adopted son" that feeds the whole family: grandfather (Cayman), father (Hong Kong) and son (WFOE).

Similar to VIE, there is also the concept of red chip structure, which has similarities and differences with VIE structure, so we won't expand on this today, and interested parties can read my "Startups Legal Talks" in Lecture 17. Here, you can simply and roughly think that Red Chip structure is VIE structure.

2. Zoom architecture is the normal company structure.

In contrast, let's look at the Zoom structure.

Zoom has four subsidiaries in China, three of which are 100% owned by the U.S. parent company in Hangzhou, Suzhou and Hefei, while the Shanghai subsidiary, Softvision (Shanghai) Software Co. is 100% owned by a Hong Kong company called Zoom Video Communications (Hong Kong) Limited. All four subsidiaries are wholly foreign-owned enterprises, and three of the subsidiaries in Hangzhou, Suzhou and Hefei are represented by Zoom's founder, Yuan Zheng.

In fact, the only thing necessary in this structure is Zoom's U.S. entity. The absence of Hong Kong, Shanghai, Suzhou, Hangzhou and Hefei does not affect Zoom's positioning as a non-Chinese stock. It's the same as Google recruiting a bunch of engineers in India. Whether Google sets up a local subsidiary, a separate company, or a local HR company to do third-party labour dispatch without setting up any company, the effect is not that different.

Then some people ask what's the deal with this Hong Kong company? With the presence of a Hong Kong company in the Zoom structure, we can basically tell that unlike Hangzhou, Suzhou and Hefei, which are purely talent centres and cost centres where money is spent, the Shanghai company should have a certain amount of income and therefore needs to avoid tax through a Hong Kong company.

So the Zoom structure is a purely American company, no different from an American company set up by a blonde American. The Delaware company on top is the big head of the octopus, as for how many places below actually establish talent centres, R&D centres, sales centres, those are all tentacles.

3.Comparison between VIE structure and Zoom structure

Said so much in front of us, we look at it again, you will find that the VIE architecture is more like a person in China, through remote Internet classes to get a U.S. degree students. What is the Zoom architecture more like? It's an American student going to school in the United States, except that this student has some extracurricular tutoring classes that are done through online classes in China. So you might ask, what's the difference between these two, both of which are distance online classes? There is a big difference, one is away (VIE structure) and one is home (Zoom structure), the VIE structure of this student, he through the online class on the U.S. course is a mandatory course, the final examination standards are also in accordance with U.S. rules, so this is more like the previous popular correspondence or electric university, a bit of water, which is why the VIE structure of the company listed in the U.S. to sell the shares of their company is not real, but a depository. The VIE structure of the company actually listed in the United States to sell is not really their company's shares, but depository receipts (ADR). And the back of this person is American, but also in the United States to go to school, take is also the United States of America's diploma, in China's online class is only a supplement, not a mandatory course.

When you hear this, you seem to understand, but then you seem to be more confused. Why was the VIE structure once the standard, but now it's a misfit? In the next instalment, we'll dissect the changing address of a company's listing from a historical perspective.

The Silicon Valley Treasure Book of Forty-Two Chapters, a customised legal encyclopaedia for founders. I'm U.S. Attorney Xiaoxiao Liu, and we'll see you in the next issue.