Securities and Exchange Commission Chair Gary Gensler released a statement[1] on Friday announcing measures the SEC will take to protect investors from actions taken by the Chinese Government. 

An estimated $1 trillion[2] has been lost from the value of overseas-listed Chinese tech stocks since the Chinese government began a widespread crackdown in February. The government is conducting cybersecurity and data privacy reviews of all the country's tech giants[3], spooking markets and forcing dozens of Chinese companies to shelve plans to list in New York[4]

Gensler explained that the Chinese government was providing "new guidance" to Chinese companies as well as stringent restrictions to those raising capital offshore. In multiple sectors, Chinese companies are not allowed to have foreign ownership and cannot directly list on exchanges outside of China, Gensler explained. 

To get around these restrictions and raise money from exchanges, Chinese companies create Variable Interest Entities (VIEs) -- effectively offshore shell companies -- that allow them to issue stock to public shareholders. The shell companies are typically set up in places like the Cayman Islands and are able to enter into contracts with the Chinese company so they can "consolidate the operating company into its financial statements."

Gensler said this recent volatility in China prompted his desire to inform investors of the danger they face when investing in Chinese companies. 

"For US investors, this arrangement creates 'exposure' to the China-based operating company, though only through a series of service contracts and other contracts. To be clear, though, neither the investors in the shell company's stock, nor the offshore shell company itself, has stock ownership in the China-based operating company. I worry that average investors may not realize that they hold stock in a shell company rather than a

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