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Will Washington-Beijing competition entice biometrics unicorns home?

Will Washington-Beijing competition entice biometrics unicorns home?
 

Maybe China’s authoritarian government is giving ground on foreign investment in domestic companies. Or maybe market economics is again pushing the government off its omniscience message.

Beijing has allowed facial recognition unicorn Megvii Technology to list its initial public offering on the high-profile Shanghai Stock Exchange.

Megvii says it expects to raise 6 billion yuan, or US$934 million. Buyers will get Chinese depositary receipts, each of which represents one share. Some of the funding will go toward its AI robotics program.

It is newsworthy because the company, which makes ethnicity-detecting biometric software, is incorporated in the Cayman Islands, thus allowing non-Chinese investment in the firm.

With the turn of the century came a new offshore corporate structure created by lawyers for Chinese internet firms needing investment that entrepreneurs could not get at home. The tactic is called a variable interest entity, and it enables foreign ownership of Chinese firms.

China historically (and not without reason) created a wall around its domestic industries, first to staunch revenue flows out of the nation. The wall evolved to also maximize the government’s control of businesses and entire industries.

The few Chinese-based companies rich, sophisticated and bold enough to court foreign investment by forming themselves as VIEs have done so knowing that the entities have no legal standing in China. The government could capriciously or categorically outlaw them.

Last December, Chinese leadership decided units of AI powerhouses Alibaba Group and Tencent Holdings should be punished with fines after they acquired firms involving VIE units.

Ten months later, Beijing is willing to reconsider, according to an article in the South China Morning Post. The same publication literally diagrams how such an entity can be structured.

As with so much of what happens in technology trade and investment today, the decision to welcome Megvii’s IPO is part of the Asia-Pacific sumo match between China and the other two major regional powers, the United States and Japan.

Megvii’s fellow face biometrics unicorn SenseTime is likewise seeking a major IPO, but in Hong Kong.

After government actions in China disadvantaged U.S. investors in Chinese tech firms, the U.S. Securities and Exchange Commission decided it was time to review how to handle Chinese VIEs that apply to list in the United States.

Beijing could use the situation to lure increasingly strategic companies into tighter relations with their home country, where it will have more influence the direction of the firms.

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