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Is it safe to go back in the water?

LightInTheBox Holding Co. debuted on the NYSE yesterday, jumping 22% in its first day of trading. It has been a long drought in the U.S. IPO market, and many investors are hoping that this is a sign that the MOU between the PCAOB and Chinese regulators might remove enough uncertainty to get the money flowing again. 

But just as it looks like it might be safe to get back in the water, up comes the VIE problemagain. Neil Gough had an interesting piece in Dealbook about the late Hong Kong tycooness Nina Wang. It turns out Ms. Wang was using a VIE-like structure to control a Chinese bank starting back in 1995. The VIE and its owner apparently decided to ignore the contracts put in place to give Ms. Wang control, leading her to sue in 1997. Chinese courts can operate slowly, and the case finally led to a ruling by China’s Supreme People’s Court last October. The ruling is a stunner. The court ruled the contractual arrangements invalid because they had clearly been intended to circumvent China’s restrictions on foreign investment, and amounted to “concealing illegal intentions with a lawful form”.

The end game

The MOU between the PCAOB and Chinese regulators over access to Chinese documents for enforcement purposes has encouraged some to say that the IPO markets are about to reopen.  

My Wall Street Journal Op/Ed explains my view that the MOU falls well short of what is needed, but I remain optimistic that these issues will soon be resolved. Here is how I see the end game working out. 

I believe that the breakdown in the SEC’s negotiations over access to audit working papers that led to charges being filed against the accounting firms caught Chinese regulators by surprise. They had been playing a cat and mouse game with the PCAOB and SEC and had finally been called out on it. My initial assessment was that the SEC actions were going to make it very difficult for both the PCAOB and the SEC to make a deal, since any deal would have to involve China backing down. We know that the CSRC and MOF made some recommendation to the State Council in December, and while we don’t know what that was, we do know that nothing happened for months. 

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