Dangerous and risky are words that get thrown about lightly as you invest in any market venture, but there is an inescapable fact that creates a very slippery slope if you plan on buying stocks in Alibaba. Chinese law prohibits foreign ownership of Chinese assets, so you will never have a title to many of the assets that Alibaba holds. The whole Alibaba IPO could be stated as somewhat of a scam, and 21st Century stock market Ponzi scheme.
When buying shares, investors generally want to know that they will own a small part of the company that they’re investing in. They want to become shareholders, even if it is at the smallest level. It wouldn’t even matter if the next Alibaba Group earnings report stated that they made $1 trillion in the last quarter. What is a share of what seems to be nothing? It’s seemingly nothing right?!
Alibaba has decided to go with the 2000 year invention called a variable interest entity structure. It seems to work well for Mr. Ma, but it is unknown how it will do for other investors. The Chinese government is very much aware of the technique to try to avert the Chinese laws against foreign ownership and could declare it an illegal maneuver. The stunning ruling in 2012 by the Supreme People’s Court of China declared a V.I.E. structure invalid used by Minsheng Bank. Alibaba points out that the structure was put in place with too much ownership provision given to foreigners. This could be enough to have investors using caution when buying shares.
When purchasing stock in Alibaba, it is not exactly clear what you are buying a share of in the company. There is no real precedent set about what happens to the value of the stock if there are any issues that arise. If ownership disputes within the company surface, it will ultimately get dealt with in Chinese courts, which generally does not go well for foreign investors.
The SEC decided the risk might be worth the potential dangers if the IPO went forward. Sales of stocks surpassed the numbers that got speculated. It is hard to keep investors from wanting to surge forward in new and exciting ventures. Mr. Ma developed Alibaba to bring China into the global community, and it is more likely that the interests of stockholders will be given every consideration in the business models used.