By Joe McDonald
BEIJING -- Foreigners who want to buy Alibaba Group shares in the Chinese e-commerce giant's U.S. public offering will need to get comfortable with an unusual business structure.
Alibaba's online and mobile commerce businesses will be controlled by a "variable interest entity," an arrangement meant to allow investors to buy into Internet and other businesses in which Beijing bans or limits foreign ownership.
Used since the 1990s by Internet operators such as Baidu (BIDU - Get Report) and Sina, (SINA - Get Report) VIEs are based on contracts that say an offshore entity in the Cayman Islands or another corporate haven will control a Chinese company. Foreign shareholders get a stake in that offshore vehicle and profit, but no ownership of the Chinese company.
"The VIE structure is the only way at present to play this game," said Paul Gillis, a professor at Peking University's Guanghua School of Management. "So if you want to invest in restricted sectors of China's economy, you have to get comfortable with the VIE structure."