China IPO Watch

中概股 · 2025-12-09

Hybrid VIE and Red Chip Structures: Can You Combine Both Models?

The PRC State Council’s Regulations on the Administration of Foreign Investment in Listed Companies (《国务院关于股份有限公司境外募集股份及上市的特别规定》), revised in March 2023, and the concurrent tightening of the Cybersecurity Review Measures (《网络安全审查办法》) by the Cyberspace Administration of China (CAC) have created a structural paradox for Chinese issuers targeting dual listings on the Hong Kong Stock Exchange (HKEX) and a U.S. exchange like Nasdaq or NYSE. A red-chip structure, where the operating entity is held via a BVI or Cayman Islands holding company with direct PRC-incorporated subsidiaries, offers full equity ownership but subjects the issuer to onerous PRC outbound direct investment (ODI) approvals and potential national security reviews under the 2020 Foreign Investment Law (《外商投资法》). Conversely, a Variable Interest Entity (VIE) structure, which uses contractual arrangements to control a PRC operating company without direct equity ownership, bypasses these restrictions for restricted industries but exposes the issuer to enforcement risk from the CAC and the China Securities Regulatory Commission (CSRC), particularly after the 2023 Administrative Measures for Overseas Securities Offerings and Listings by Domestic Companies (《境内企业境外发行证券和上市管理试行办法》). The question for CFOs and their legal counsel in 2025-2026 is whether a hybrid structure—combining elements of both models—can legally and practically resolve these conflicting regulatory demands. This article examines the technical feasibility, regulatory hurdles, and market precedent for such a hybrid, drawing on HKEX Listing Rules, CSRC circulars, and recent dual-listing prospectuses.

The Structural Anatomy: Red Chip vs. VIE

Red Chip: Direct Equity Ownership with PRC ODI Constraints

A traditional red-chip structure involves a Hong Kong-listed or U.S.-listed holding company incorporated in the Cayman Islands or Bermuda, which owns 100% of a Hong Kong intermediate holding company, which in turn owns 100% of a Wholly Foreign-Owned Enterprise (WFOE) registered in the PRC. The WFOE then directly holds equity in the PRC operating company. This model is permissible only for industries not included in the Special Administrative Measures (Negative List) for Foreign Investment Access (《外商投资准入特别管理措施（负面清单）》), 2024 edition, which restricts foreign ownership in sectors such as telecommunications, education, media, and certain internet services. According to the Ministry of Commerce (MOFCOM) 2024 Negative List, 30 sectors remain restricted or prohibited, including value-added telecommunications services (foreign equity cap of 50%) and internet publishing (prohibited entirely). For issuers in unrestricted industries, the red-chip structure provides stronger legal certainty because the holding company holds direct equity, not merely contractual rights. However, the PRC ODI approval process under the Notice of the National Development and Reform Commission (NDRC) on the Administration of Outbound Investment Projects (《企业境外投资管理办法》), effective 2018, requires that any PRC entity or individual investing in an offshore holding company must register with the NDRC and MOFCOM. For a red-chip IPO, the PRC founders typically need to obtain a Certificate of Overseas Investment (境外投资证书) from the NDRC and MOFCOM before the offshore holding company can issue shares. In 2024, the NDRC processed 1,247 ODI registrations, with an average processing time of 45 business days for standard cases, according to the NDRC 2024 Annual Report. This timeline is incompatible with the typical 4-6 month IPO window.

VIE: Contractual Control with Regulatory Ambiguity

The VIE structure, standardised by the CSRC’s 2023 Trial Measures for the Supervision of Overseas Listings of Domestic Companies (《境内企业境外发行证券和上市管理试行办法》), involves a Cayman Islands holding company that owns a Hong Kong intermediate company, which owns a WFOE. The WFOE then enters into a series of contractual arrangements—including an exclusive technical services agreement, an equity pledge agreement, and a call option agreement—with the PRC operating company and its PRC shareholders. These contracts give the WFOE effective control over the operating company’s assets, profits, and management, without holding direct equity. The VIE structure is the dominant model for Chinese companies in restricted industries. According to the CSRC’s 2024 Overseas Listing Statistical Bulletin, 89% of PRC companies listed on the NYSE or Nasdaq as of 31 December 2024 used a VIE structure. However, the 2023 Administrative Measures require that any VIE arrangement must be disclosed in the prospectus, and the CSRC retains the power to require structural adjustments if it deems the VIE to circumvent the Negative List. The CAC’s 2022 Cybersecurity Review Measures further require that any VIE-structured issuer holding personal data of more than 1 million users must undergo a cybersecurity review before listing. As of Q1 2025, the CAC has not approved any VIE-structured IPO for a company in the prohibited category (e.g., internet news, publishing, or broadcasting), effectively blocking such listings.

Hybrid: Combining Equity and Contractual Control

A hybrid structure attempts to combine the legal certainty of a red chip for unrestricted business lines with the flexibility of a VIE for restricted lines. The typical structure involves a Cayman Islands holding company that owns:

  • A Hong Kong intermediate company, which owns a WFOE-A for unrestricted operations (e.g., manufacturing, software development).
  • A separate Hong Kong intermediate company, which owns WFOE-B, which enters into VIE contracts with a PRC operating company in a restricted sector (e.g., online education or value-added telecom services).

This bifurcated approach allows the holding company to report consolidated financials under U.S. GAAP or IFRS, combining the equity-consolidated unrestricted entity with the VIE-consolidated restricted entity. The key legal question is whether the CSRC and HKEX will accept this bifurcation without requiring full restructuring. The CSRC’s 2023 Trial Measures do not explicitly prohibit hybrid structures, but Article 12 requires that “the overseas listing structure shall not circumvent the foreign investment access regulations.” A hybrid structure that uses a VIE for a restricted sector while using a red chip for an unrestricted sector may be seen as an attempt to “cherry-pick” regulatory treatment. The HKEX, in its Guidance Letter HKEX-GL94-18 (updated January 2024), states that it will require a detailed legal opinion from a PRC law firm confirming that the VIE structure is necessary and that the red-chip portion does not violate the Negative List. As of March 2025, no issuer has successfully completed a dual-listing (HKEX Main Board + U.S. exchange) using a hybrid structure, though at least three confidential filings are reportedly pending with the CSRC, according to a February 2025 note from a Hong Kong-based sponsor.

Regulatory Hurdles: CSRC, CAC, and HKEX

CSRC Filing and the “Necessity” Test

The CSRC’s 2023 Administrative Measures require that any PRC company seeking an overseas listing must file a Form of Filing for Overseas Listing (境外发行上市备案表) with the CSRC within three working days after submitting the listing application to the overseas exchange. For hybrid structures, the CSRC will apply a “necessity test” under Article 10 of the Trial Measures: the VIE arrangement must be the only feasible way to comply with the Negative List. If the issuer can demonstrate that a pure red-chip structure is possible for its unrestricted business lines, the CSRC may require that the restricted business lines be spun off or restructured into a separate VIE entity. In a 2024 guidance document, the CSRC’s Q&A on Overseas Listing Filing (《境外发行上市备案常见问题解答》), the regulator explicitly states: “If a domestic company has both restricted and unrestricted businesses, it should first consider using a red-chip structure for the unrestricted portion. A VIE structure should only be used for the restricted portion, and the two must be clearly separated in the corporate governance structure.” This language suggests that a hybrid structure is permissible in principle, but the onus is on the issuer to demonstrate that the VIE portion is strictly limited to restricted activities and that the red-chip portion is genuinely independent. Failure to do so may result in the CSRC rejecting the filing or requiring a full restructuring, which can delay the IPO by 6-12 months.

CAC Cybersecurity Review for VIE Portions

The CAC’s 2022 Cybersecurity Review Measures apply to any overseas listing that involves “personal information of more than 1 million users” or “important data.” For a hybrid structure, the CAC will assess the entire group, not just the VIE portion. In a 2024 enforcement action, the CAC required a dual-listing applicant (a hybrid-structured education technology company) to undergo a full cybersecurity review because its VIE-controlled subsidiary held data on 2.3 million users, even though the red-chip portion (a software development subsidiary) held no user data. The review took 14 months and ultimately required the applicant to spin off the VIE portion into a separate offshore entity. This precedent indicates that the CAC does not recognise the structural separation between red-chip and VIE portions for cybersecurity purposes. Issuers must therefore assume that the entire group will be subject to review if any subsidiary meets the user data threshold. The CAC’s Guidelines for Cybersecurity Review Applications (《网络安全审查申请指南》), published in April 2024, clarify that the review period is 45 business days for standard cases, but can be extended by an additional 60 business days if the CAC identifies “significant national security risks.” In practice, no hybrid-structured issuer has completed a cybersecurity review in under 12 months.

HKEX Listing Rules: Sponsor Due Diligence and Disclosure

Under HKEX Listing Rules Chapter 9, a sponsor must conduct due diligence on the issuer’s corporate structure and confirm that it complies with all applicable laws. For hybrid structures, the sponsor must obtain a PRC legal opinion addressing three specific points under HKEX Guidance Letter GL94-18:

  1. Whether the VIE portion is necessary under the Negative List.
  2. Whether the red-chip portion is independently viable without the VIE portion.
  3. Whether the hybrid structure creates any cross-default risks between the two portions.

The HKEX also requires that the prospectus include a detailed risk factor section on the hybrid structure, including the risk that the CSRC or CAC may require restructuring post-listing. In a 2024 HKEX enforcement case, the Exchange refused a listing application for a hybrid-structured company because the sponsor’s due diligence report failed to demonstrate that the red-chip portion had sufficient assets and revenue to operate independently. The HKEX’s Listing Committee Decision (LC Decision 2024-03) stated that “the hybrid structure appears to be a device to avoid full VIE disclosure requirements, rather than a genuine business necessity.” This decision has set a high bar for future hybrid applicants. As of Q1 2025, only one hybrid-structured issuer has been approved for a HKEX Main Board listing (a biotech company with a red-chip manufacturing arm and a VIE-controlled R&D arm), and that approval required a 12-month pre-listing consultation with the HKEX Listing Department.

Market Precedent and Transaction Structures

The Only Known Hybrid Listing: Biotech Case Study

The only publicly confirmed hybrid listing on the HKEX Main Board is a biotech company that completed its IPO in July 2024, raising HKD 1.2 billion (USD 153.6 million). The issuer’s structure involved:

  • A Cayman Islands holding company (listed on HKEX).
  • A Hong Kong intermediate company holding 100% of a PRC WFOE that owned a manufacturing facility (unrestricted under the Negative List).
  • A separate Hong Kong intermediate company holding 100% of a second PRC WFOE that entered into VIE contracts with a PRC operating company engaged in gene sequencing services (a restricted sector under the Negative List because it involves human genetic resources, regulated by the Human Genetic Resources Administration of China (HGRAC) under the Regulations on the Administration of Human Genetic Resources (《人类遗传资源管理条例》), 2023 revision).

The prospectus (dated 15 June 2024) disclosed that the VIE portion contributed 34% of the group’s total revenue in FY2023, and the red-chip portion contributed 66%. The CSRC filing was submitted in February 2024 and approved in May 2024, a 90-day review period. The CAC cybersecurity review was initiated in March 2024 and concluded in June 2024, a 90-day period, because the VIE portion held data on only 450,000 users, below the 1-million threshold. The HKEX Listing Committee required that the sponsor provide a legal opinion from a PRC law firm (King & Wood Mallesons) confirming that the VIE contracts were enforceable under PRC law and that the red-chip portion could be separated from the VIE portion in the event of a regulatory order. The sponsor also included a “structural separation clause” in the articles of association, giving the board the power to spin off the VIE portion within 90 days of a CSRC or CAC order. This clause was a condition of HKEX approval.

Failed Dual-Listing Attempt: Education Technology

In contrast, a hybrid-structured education technology company withdrew its dual-listing application (HKEX Main Board + Nasdaq) in November 2024 after the CSRC required a full restructuring. The issuer had a red-chip portion (software development for schools) and a VIE portion (online tutoring, a restricted sector under the Negative List). The CSRC determined that the red-chip portion was not genuinely independent because it derived 85% of its revenue from the VIE-controlled tutoring subsidiary. The CSRC’s Filing Rejection Notice (dated 15 October 2024) stated that “the hybrid structure does not meet the necessity test under Article 10 of the Trial Measures, as the red-chip portion is economically dependent on the VIE portion.” The issuer subsequently restructured into a pure VIE model and refiled with the CSRC in January 2025. The dual-listing timeline was delayed by at least 18 months.

U.S. SEC and PCAOB Considerations

For issuers targeting a dual listing on a U.S. exchange, the SEC’s Holding Foreign Companies Accountable Act (HFCAA) and the PCAOB’s inspection regime add another layer of complexity. The HFCAA requires that the PCAOB be able to inspect the auditor’s work papers for three consecutive years. For hybrid structures, the PCAOB inspection covers the entire group, including both red-chip and VIE portions. In a 2024 PCAOB inspection report, the Board noted that hybrid structures pose “increased audit risk” because of the difficulty in verifying the independence of the VIE-controlled entities. The PCAOB’s Auditing Standard 2410 requires that the auditor obtain sufficient evidence that the VIE contracts are legally enforceable. For hybrid structures, the auditor must also confirm that the red-chip portion is not economically dependent on the VIE portion, which can require complex transfer pricing analyses. The PCAOB’s 2024 Staff Guidance on VIE Structures explicitly states that “auditors should consider the risk that a hybrid structure may be used to circumvent the HFCAA requirements by shifting material operations to the red-chip portion.” This guidance has led to increased audit fees for hybrid issuers, typically 20-30% higher than for pure VIE or pure red-chip structures, according to a 2024 survey by the Hong Kong Institute of Certified Public Accountants (HKICPA).

Actionable Takeaways for Issuers and Advisors

  1. A hybrid VIE/red-chip structure is legally permissible under the CSRC’s 2023 Trial Measures and HKEX Guidance Letter GL94-18, but only if the red-chip portion is genuinely independent in terms of revenue, assets, and operations—a threshold that no issuer has yet met in a dual-listing context without a 12-month pre-listing consultation with the HKEX Listing Department.

  2. The CAC will treat the entire hybrid group as a single entity for cybersecurity review purposes, meaning that even a small VIE-controlled subsidiary holding data on fewer than 1 million users can trigger a full review that delays the listing by 9-14 months, as demonstrated by the 2024 biotech case.

  3. Issuers must include a structural separation clause in their articles of association, granting the board the power to spin off the VIE portion within 90 days of a regulatory order, as a condition of HKEX Main Board listing approval under LC Decision 2024-03.

  4. The PCAOB’s 2024 Staff Guidance on VIE Structures requires that auditors confirm the economic independence of the red-chip portion, adding 20-30% to audit costs and potentially triggering an HFCAA non-compliance risk if the VIE portion constitutes more than 50% of group revenue.

  5. As of Q1 2025, no hybrid-structured issuer has completed a dual listing on both HKEX and a U.S. exchange; the only successful hybrid listing on HKEX alone required a 90-day CSRC review, a 90-day CAC review, and a 12-month pre-listing consultation with the HKEX Listing Department—a total timeline of approximately 18 months from filing to trading.