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Chinese Internet Giant Could Win Largest Ever U.S. Initial Stock Offering
The Free Beacon ^ | July 16 2014 | Daniel Wiser

Posted on 07/16/2014 9:37:41 AM PDT by PoloSec

A Chinese Internet giant is expected to win approval from the Securities and Exchange Commission (SEC) for potentially the largest ever U.S. initial stock offering despite a myriad of investment and security risks posed by the IPO, critics say.

Alibaba Group Holding Ltd., a Chinese company whose online retail sales exceed those of U.S. competitors, such as Amazon or Ebay, currently awaits SEC approval for the stock sale that could raise as much as $20 billion. The SEC has assented to several IPOs of Chinese companies with similar corporate structures since 2000.

However, critics of the offering say the potential financial benefits for U.S. investors mask serious concerns about Alibaba’s opaque corporate structure, the risks involved for U.S. shareholders, and the personal security of Americans. Congress and the Obama administration have raised few objections to the stock sale.

Alibaba plans to operate as a variable interest entity (VIE), a setup that allows it to avoid a Chinese prohibition on foreign investment in key industries such as the Internet and telecommunications. Chinese companies in the past have split their operations between a wholly foreign-owned subsidiary incorporated offshore, typically in the Cayman Islands, and a VIE in China that contains licenses and assets barred from foreign ownership.

The U.S.-China Economic and Security Review Commission said in a report last month that “U.S. shareholders face major risks from the complexity and purpose of the VIE structure.” VIEs can still be “considered illegal” in China, and Chinese judges are unlikely to honor the contracts between the foreign-owned subsidiary and the VIE if U.S. shareholders seek to challenge the company in court, the report said.

David Yerushalmi, a securities litigator and co-founder of the American Freedom Law Center, said at a panel discussion on Tuesday that the lack of transparency associated with Alibaba’s structure should be raising more red flags among regulators and investors.

“Contractual relationships do not create the ownership rights, disclosure, and transparency that [Americans] expect when we buy an equity interest in a company,” he said at the event hosted by the Center for Security Policy (CSP) at the National Press Club.

Yerushalmi added that U.S. investors would find it difficult to recover assets if Alibaba suffered financial troubles.

“U.S. shareholders would have no U.S. law or U.S. judicial system to rely upon,” he said. “They would have to litigate in China under Chinese law without any protections that U.S. law provides.”

Hong Kong regulators last year rejected Alibaba’s plans for an IPO in the city over concerns that a 27-member group would have sole authority to nominate a majority of the company’s nine directors.

Alibaba has not commented publicly on the company’s effort to have the offering in New York as it enters a pre-IPO quiet period. The company does note in its IPO filing with the SEC that “the contractual arrangements may not be as effective in providing operational control as direct ownership.”

Experts say Alibaba also poses a threat to the personal security of Americans as it expands its operations in the United States.

Michelle Van Cleave, a former U.S. national counterintelligence executive, said Alibaba’s e-commerce business would enable it to access personal information from individual consumers. The company has invested in several U.S. tech companies in recent months, including contributions to a $250 million funding round in April for the ride-sharing app developer Lyft.

The Washington Postreported on Saturday that a Florida-based biofuel company traced millions of hacking attempts on its computers this year to IP addresses and servers affiliated with the People’s Liberation Army (PLA), China’s military, and Aliyun Computing. Aliyun is the cloud computing subsidiary of Alibaba.

Alibaba said the U.S. biofuel company, Algenol, confused ordinary Internet traffic for attacks.

Frank Gaffney, president and CEO of CSP, said a U.S. IPO for Alibaba would increase “the likelihood that we’re creating new opportunities that are not going to be disclosed properly to American consumers for personal information about them or proprietary information critical to their companies’ economic success” to be compromised.

Algenol’s accusations follow mounting concerns about the Chinese government’s aggressive cyber espionage activities. U.S. authorities issued unprecedented indictments in May against five Chinese military hackers who allegedly engaged in widespread theft of American corporate and trade secrets.

The PLA responded to the indictments by announcing that it would establish a high-level cyberspace intelligence center.

TOPICS: Business/Economy; Foreign Affairs; News/Current Events
KEYWORDS: alibaba; china; ipo; sec
Nothing foolish happening here, move on folks.
1 posted on 07/16/2014 9:37:41 AM PDT by PoloSec
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To: PoloSec

Yes, The Chinese Communists are nothing if not trustworthy! They would never lie about earnings or steel technologies from others.

2 posted on 07/16/2014 9:45:04 AM PDT by Jim from C-Town (The government is rarely benevolent, often malevolent and never benign!)
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To: PoloSec

Wasn’t Ali Baba the leader of a gang of thieves?

3 posted on 07/16/2014 9:54:08 AM PDT by Argus
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To: PoloSec

Is the company’s full name Ali Baba and the Seven Thieves?

4 posted on 07/16/2014 9:55:10 AM PDT by Cicero (Marcus Tullius)
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To: PoloSec
Re: “Alibaba - a Chinese company whose online retail sales exceed those of U.S. competitors like Amazon and Ebay.”

That's surprising.

China has 4 times as many people.

But, the USA has 8 times the per capita income.

Plus, at first glance, home delivery in China looks like it would be more complex, slower, and more expensive than in America, but I don't know how to find reliable Chinese data on that.

My instincts say that Alibaba owes a large measure of its success to the absence of competitors which, most likely, is vigorously enforced by the Communist Party.

5 posted on 07/16/2014 10:06:40 AM PDT by zeestephen
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To: zeestephen

Alibaba probably makes a lot of money through foreign sales.

6 posted on 07/16/2014 10:15:14 AM PDT by GeronL (Vote for Conservatives not for Republicans)
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To: GeronL

According to Wikipedia, the company began as a Business-to-Business website that linked Chinese manufacturers directly to foreign buyers.

They also started a Chinese “Pay-Pal” knock off, so they probably earn substantial money by financing small consumer purchases, since credit card use is still quite limited in China.

Also of interest:

They own the largest TV shopping network in China.

They deliver more than 60% of parcels in China.

7 posted on 07/16/2014 10:42:17 AM PDT by zeestephen
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To: PoloSec
Alibaba was started as a b2b site (to those in Rio Linda, that's business to business), I saw a few things from them (boats and bikes) that might be of interest to consumers.

of course, with the boats made in china.. I wonder if they would sink.

8 posted on 07/16/2014 11:44:06 AM PDT by ExCTCitizen (I'm ExCTCitizen and I ai-pprove this reply. If it does offend Libs, I'm NOT sorry...)
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