Startup Legal Talks (12)

The difference between the Zoom structure and the VIE structure, and the detailed distribution of the global structure of non-China stocks

In the last issue, we introduced what is a Chinese concept stock and why Zoom is not a Chinese concept stock. So how do Chinese entrepreneurs build a structure similar to Zoom and successfully list in the United States? In this issue, we will analyze in detail the construction of the global structure of non-Chinese stocks.

1. Zoom's global architecture

First, let's take a look at Zoom's office map. What we can see is that Zoom has offices all over the world, in addition to the United States, as well as China, India, Singapore and other regions.

Looking at the Sino-US structure alone, Zoom has four subsidiaries in China, of which the US parent company directly holds 100% of the three subsidiaries in Hangzhou, Suzhou and Hefei, and the subsidiary in Shanghai - Softvision (Shanghai) Software Co., Ltd. The company is 100% controlled by a Hong Kong company called Zoom Video Communications (Hong Kong) Limited. These four subsidiaries are all wholly foreign-owned enterprises, and the legal representatives of the three subsidiaries in Hangzhou, Suzhou and Hefei are Yuan Zheng, the founder of Zoom.

In terms of employees, as of January 31, 2019, Zoom had a total of 1,702 full-time employees, of which 1,012 were in the United States and 690 were in other international locations. Among the 690 international employees, more than 500 are Chinese employees. Zoom has also set up technology centers in India, Singapore and other places for the same purpose, transferring R&D technology work to areas with relatively cheap labor to gain cost advantages to achieve labor market arbitrage.

2. Comparison of Zoom Architecture and VIE Architecture

What is the difference between the once popular VIE architecture and the Zoom architecture?

Zoom Architecture:

The first layer is the actual business entity that is 100% controlled by the founders and investors, that is, a company in the United States. This American company is a listed company. Note that in this structure, the founders and investors usually do not need additional A company is set up to hold shares in a listed company in the United States, so we believe that this listed company in the United States is the first layer of the Zoom structure.

The second layer is the establishment of wholly-owned subsidiaries by American companies in China and other international regions. Not to mention those of other countries, subsidiaries in China are wholly foreign-owned enterprises (WFOE), because WFOEs have some preferential policies. Note that although we just saw that there is a Hong Kong company in Zoom's structure, this Hong Kong company is not the core element of this structure, it is optional.

VIE structure:

1. At the top are two offshore companies, one for the founder and one for the investor.

2. The second layer is a company that really wants to become a listed entity, which is an offshore company. This offshore company can be either BVI or Cayman, but because mainstream stock exchanges do not accept BVI companies for listing, the listing entity is often registered as Cayman.

3. The third layer is Hong Kong companies, because Hong Kong companies can enjoy a lot of preferential treatment in the mainland.

4. The fourth floor is a wholly foreign-owned enterprise, which is what we often call WFOE. This establishment is also because the wholly foreign-owned enterprise has some preferential policies.

5. The domestic company next to it has no holding relationship with the company on the WOFE line at all, but is connected through agreement control.

To summarize the differences between the Zoom architecture and the VIE architecture:

From the perspective of capital flow, the Zoom structure is that foreign capital is invested in a foreign company and the foreign company is actually operated, while the VIE structure is that foreign capital is invested in a domestic company for the actual operation of a domestic company;

From the perspective of control mode, the Zoom architecture is completely a top-down equity holding mode, while the core of the VIE architecture is protocol control;

In terms of stability, the WOFE in the Zoom architecture is the same person as the actual controller of the US company (that is, the listed entity), so it is more stable. However, because the VIE structure is controlled by agreement, its stability is extremely dependent on the consistency of the interests of the actual controller of the listed entity and the actual controller of the domestic entity and the moral standards of the two. If there is a conflict of interests, there will be potential moral hazard;

From the perspective of the way to obtain profits, Zoom uses labor market arbitrage to transfer R&D technical work to areas with cheap labor to obtain cost advantages, while the profit of the VIE structure is to distribute dividends from “subsidiaries to the parent company” completed in the form.

In addition, companies listed on the VIE structure face other risks because of their status as "China Concept Stocks".

1. High taxes

Since January 1, 2019, the Cayman Islands has solemnly launched the "Economic Substance Act", requiring companies established in the Cayman Islands to conduct actual operations, including personnel and venues, must be deployed in the Cayman company. Hiring people and renting offices in Cayman is impossible for many companies. But if this condition is not met, companies in Cayman could face fines, write-offs, or even up to five years in prison for the person in charge.

The only way to circumvent this requirement is to declare as a tax resident in the place where your company actually operates, which means that the tax advantage of the Cayman Islands is completely lost in accordance with the high tax rate in the country where it actually operates.

2. Sanctions Risk

Previously, the US Securities Regulatory Commission left a loophole for Chinese concept stocks. The Foreign Company Accountability Act passed in the United States in 2020 stipulates that Chinese concept stocks must disclose audit reports to the US Securities Regulatory Commission. If they do not meet the regulations within three years, they must be delisted from the United States. That is to say, the US Securities Regulatory Commission does not want to leave a loophole for Chinese concept stocks now. To make these fake listed companies meet the requirements of real listing. It can be seen that a large number of Chinese concept stocks are facing the risk of delisting.

Based on these analyses, compared with the VIE structure with many risks, the more concise, stable and efficient Zoom structure will be more suitable for Chinese entrepreneurs to list in the United States.

Now, are you more at ease? It's not because you are a Chinese with black hair, black eyes, and yellow skin that will define your startup as a "China concept stock". By building a set of Zoom-like non-China stocks With the global structure of the concept stock, your company can also be successfully listed in the United States.