In a report to Congress, the Securities and Exchange Commission’s (SEC) Office of the Investor Advocate (OIAD) said that it will study investor protection issues related to China-based variable interest entities (VIEs) in light of the increasing exposure of U.S. investors to these companies.
This is one of several objectives for the OIAD in fiscal 2026, which starts on October 1, 2025.
“In doing so, the Investor Advocate will endeavor to elevate concerns regarding China-based VIEs to the attention of the Commission and relevant SEC staff,” according to the report, issued on June 25.
Companies in certain sectors in China are not allowed to have foreign ownership and cannot directly list on exchanges outside of China. Thus, many China-based operating companies are structured as VIEs to raise funds on such exchanges.
Typically, a China-based operating company sets up an offshore shell company to sell stock to the public. That shell company, which has service contracts with the operating company, issues the shares on a foreign exchange like the New York Stock Exchange.
The shell company has no equity ownership in the operating company, but the shell company can consolidate the operating company into its financial statements for accounting purposes. This arrangement exposes U.S. investors to the Chinese operating company through a series of service contracts.
“The emergence and proliferation of these U.S.-listed companies implicate a range of investor protection issues, including concerns over the reliability of their financial reporting, the quality of their disclosures, the enforceability of their contractual arrangements, limitations on shareholder rights, and the extent of intervention or control by the PRC [People’s Republic of China] government over the Chinese operating companies,” the report said.
This is not the first time that commission officials have sounded the alarm on Chinese companies in recent years.
The SEC during Gary Gensler’s tenure warned investors about Chinese companies.
In December 2021 the SEC’s Division of Corporation Finance (CorpFin) posted a sample staff comment letter to China-based companies listed on U.S. exchanges, asking them to provide better disclosures because of heightened risks associated with investing in such companies.
CorpFin “believes that more prominent, specific, and tailored disclosure about these risks, and companies’ use of the variable interest entity (VIE) structure specifically, is warranted to provide investors with the information they need to make informed investment decisions and for companies to comply with their disclosure obligations under the federal securities laws,” according to the introduction to the Sample Letter to China-Based Companies.
Then in July 2023 CorpFin posted another staff sample letter to better help companies based in China disclose pertinent information about their operations in filings with the commission.
The sample letter focused on, among other areas, more specific and prominent disclosure about material risks related to the role of the Chinese government in the companies’ operations and disclosures related to material impacts of certain laws.
Other Objectives for Fiscal 2026
Besides China-based VIEs, the investor advocate has several other objectives for fiscal 2026 as follows:
- Enhancing the Accessibility of Disclosures for Investors – this is aimed at enhancing accessibility for retail investors, such as making information more user-friendly and comprehensible.
- Disclosure and Investor Testing – this is also intended for retail investors.
- Private Market Investments in Retirement Accounts – OIAD will explore some of the issues surrounding the inclusion of alternative investments in retirement plans and their implications for retail investors.
- Evaluating the Potential Impact of Self-Regulatory Organization (SRO) Rule Proposals on Investors—SROs are national stock exchanges, broker-dealers, and clearing agencies.
- Crypto Task Force Requests for Information – The task force is seeking comment on various issues related to crypto, including staking and custody as well as whether a particular crypto asset is a security. OIAD is encouraging investors to send comment letters to the task force, and the office will also consider insights that investors shared with the task force.
This article originally appeared in the July 10, 2025, edition of Accounting & Compliance Alert, available on Checkpoint.
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