On eve of Alibaba's IPO, Senator urges SEC to look at risks in some Chinese offerings

The Alibaba Group may be preparing for a new life as a publicly traded company on the New York Stock Exchange. But one senator is urging securities regulators to take care in letting certain other Chinese companies do the same.

In a letter to the Securities and Exchange Commission that was published on Wednesday, Senator Bob Casey, Democrat of Pennsylvania, urged the regulator to look further into the risks of companies using the same corporate structure as the Chinese e-commerce giant.

Alibaba is set up as a so-called variable-interest entity, a common arrangement for many Chinese companies listing in the United States. The structure was set up to help companies get around Chinese government restrictions on foreign investments in select industries, like technology.

But as the Deal Professor noted, such structures have proved controversial for a number of reasons. Among them is that the structures are highly complicated: Though Alibaba is best known as a Chinese internet behemoth, the company that is going public is technically an entity based in the Cayman Islands that has contractual rights to the profits of Alibaba China, but no economic interest.

Casey likened the structure's potential for trouble to the corporate finance tool that enabled an earlier wave of Chinese stock sales in the United States known as a "reverse merger". There, Chinese businesses would buy small publicly traded American companies, gaining a stock listing without going through the traditional IPO process. The senator pointed out that the process led to abuse, with an investigation finding that failed Chinese reverse merger companies had cost American investors about $18 billion from 2001 to 2011.

(Some academics have cast doubt on that contention, arguing that such companies were no more likely to lead to fraud than any other kind.)

Casey called upon the SEC to redouble its efforts to investigate whether companies set up like Alibaba are making proper disclosures and complying with securities regulations.

"Rarely in history has there been an IPO of this size for a company that we know less about," the senator said in a statement. "I continue to be concerned that about the level of transparency from Chinese firms listing in our markets. The SEC has an obligation to step up its enforcement efforts and press these firms for additional information so that investors are protected."

©2014 The New York Times News Service