A variable interest entity (VIE) is a company in which control is established and enforced through a series of contractual arrangements, rather than through equity ownership. In some countries with restrictions on foreign direct investment, companies may use VIEs as investment vehicles to offer shares to foreigners. However, because ownership of a variable interest entity does not represent true ownership of the company’s assets, investing in VIEs carries additional risks. These include:
Lack of true asset ownership. VIEs do not represent ownership in the company as stock does. In the event of a bankruptcy, owners of a VIE may not be entitled to the assets of the underlying firm.
Corporate governance. Because shares in a variable interest entity do not generally entail true voting rights, owners of VIE vehicles may have limited influence over issues of corporate governance.
Legal and regulatory. Historically, VIE structures have not been well-tested in court. In the future, there is the risk that foreign courts, regulators, or governments may invalidate them.