Overview
On March 20, 2026, Senate Banking Committee Chairman Tim Scott (R-SC) and Ranking Member Elizabeth Warren (D-MA), joined by sixteen colleagues, sent a bipartisan letter to Securities and Exchange Commission (“SEC”) Chairman Paul Atkins urging the agency to restrict Chinese companies’ access to US capital markets. The letter cited “unique risks to national security, market integrity and investor protection posed by SEC-registered entities with ties to the People’s Republic of China.” [1]
The letter is the latest development in an accelerating regulatory and legislative effort to treat Chinese capital market access as a national security variable. This shift reframes how investors and their counsel must evaluate exposure to Chinese issuers: what was once treated primarily as a disclosure sufficiency question is increasingly a matter of jurisdictional risk, enforceability, and potential regulatory impairment. Capital deployed through variable interest entity (“VIE”) structures is exposed not only to the underlying company’s performance, but also to the vagaries of the relationship between US national security policy and Chinese state authority — which means that access to information, legal recourse, and even the continued existence of the investment itself may be contingent on decisions made outside traditional market frameworks.
As a result, diligence processes that rely on public filings and audit assurances alone are unlikely to capture the full scope of risk now driving enforcement, policy, and market access decisions.
Background: The VIE Structure and Its Risks
At the center of Congressional concern is the VIE structure — a legal architecture that allows Chinese companies to list on US exchanges while technically complying with Beijing’s restrictions on foreign ownership of sensitive industries. [2] In practice, a US investor buying shares in a VIE-structured company holds an interest in an offshore shell entity with contractual claims on the profits of a Chinese operating company — but no direct ownership of the Chinese company.
The entity a US investor actually owns may have few employees, no physical assets, and contractual rights that Chinese courts have shown little interest in enforcing. The operating company — where revenues are generated, data is held, and government relationships are maintained — sits behind a wall of Chinese corporate law that US regulators and shareholders cannot easily penetrate.
Although the pace of Chinese listings on US exchanges has slowed in the last two years, the number of listings grew measurably in the last decade, almost doubling from 88 in 2017 to 159 in 2025. At the start of the year, 159 VIE-structured Chinese companies, representing over $1 trillion in market capitalization, were listed on American exchanges. [3] While these issuers include some ‘blue chip’ Chinese companies, such as Alibaba and Weibo, the majority are small-cap companies — frequently in industries under trade scrutiny such as technology and telecom — looking to access US capital markets.
The SEC has acknowledged this risk directly, with their Office of the Investor Advocate flagging growing investor exposure to VIE structures as a priority concern. In September 2025, to scrutinize companies where “governmental control and other factors pose unique investor risks,” Chairman Atkins launched a cross-border fraud task force that targets auditors who help foreign companies access US capital markets. [4]
What Public Disclosure Does Not Surface
The 2022 agreement between the Public Company Accounting Oversight Board and Chinese authorities to allow American regulators to inspect Chinese auditors was a significant milestone. [5] However, audit inspection access is not the same as investigative transparency. Public filings for VIE-structured companies frequently omit or obscure several categories of material information:
- Beneficial ownership: The identity of ultimate beneficial owners, particularly where nominee structures or state-owned enterprise affiliations are present.
- Party and government affiliations: The nature and depth of relationships between operating company leadership and Chinese Communist Party organs, military-affiliated research institutions, or provincial government bodies.
- Regulatory dependencies: Licensing structures that create leverage points for Beijing to exert control over business decisions — including the ability to effectively nationalize operations under Chinese law.
- Data exposure: What user or operational data the company holds, where it is stored, and what obligations exist under China’s National Intelligence Law and Data Security Law to provide government access on demand. [6]
- Geopolitical footprint: Prior state contracts, dual-use or military technology involvement, operations in sanctioned jurisdictions, and relationships with entities on US restricted lists.
For legal counsel conducting pre-investment or ongoing portfolio reviews, and for fund managers with fiduciary obligations, this gap is not an abstraction — it is a chasm fraught with liability.
The Regulatory Trajectory
Congressional pressure on the SEC is part of a broader national security belt-tightening across multiple regulatory fronts:
- The US Treasury’s Committee on Foreign Investment in the US has expanded its jurisdiction and sharpened its focus on data-sensitive transactions, particularly those involving Chinese acquirers or investors. [7]
- Commerce Department export controls increasingly target technology transfers to ostensibly commercial entities with Chinese government ties, with the Bureau of Industry and Security’s Entity List updated continuously through 2025 and 2026. [8]
- Department of Treasury Office of Foreign Asset Control (“OFAC”) sanctions designations have expanded well beyond technology and financial services into defense, energy, critical infrastructure, and emerging sectors including artificial intelligence (“AI”), semiconductors, and quantum technologies. In 2025 alone, OFAC designated more than 200 Chinese individuals and entities under Iran-, cyber-, North Korea-, and counter-narcotics-related programs. [9]
- Outbound investment screening is now a regulatory reality. The Treasury Department’s Outbound Investment Security Program, or OISP, which took effect in January 2025, established mandatory screening of US investments in Chinese-owned companies that deal in AI, quantum information technologies, and semiconductors and microelectronics. The Comprehensive Outbound Investment National Security Act, or COINS Act, signed in December 2025, further expanded OISP’s scope. [10]
- Department of Defense Chinese Military Company designations under the 1260H List now cover 134 entities across the AI, aerospace, and biotechnology sectors. [11] Effective June 30, 2026, the Department of Defense is prohibited from contracting with listed entities or their affiliates, and proposed legislation could extend OFAC-style sanctions to listed companies. [12]
- Commerce Department’s Information and Communications Technology and Services regulations took effect in February 2025, establishing a review and prohibition framework for information and communications technology and services transactions involving critical infrastructure, sensitive personal data, and critical or emerging technologies with a Chinese nexus. [13]
- SEC enforcement under Atkins has already halted the trading in nearly a dozen Chinese companies that showed signs of manipulative behavior, with further action anticipated. [14]
One pattern is consistent across these developments: the exposure that creates the most serious problems for investors is rarely what was disclosed; but the exposure the disclosure framework was not designed to illuminate.
Conclusion
Acting across party lines, Washington has concluded that Chinese capital market access is a national security matter, forging a consensus will drive regulatory change that affects every major investor class.
Portfolios with meaningful exposure to VIE-structured Chinese issuers hold not just a disclosure risk, but assets that exist in regulatory environment likely to become more restrictive; that are governed with an opacity that fosters litigation and reputational exposure; and that are issued by companies that may have obligations to the Chinese state that are structurally adverse to shareholder interests.
The VIE structure was never designed to provide transparency. It was a façade designed to work around restrictions. Understanding the reality behind the structure is not optional due diligence. In the current environment, it is the diligence.
