“Investors are at risk of losing their investments if Chinese officials decide to strictly enforce laws that prohibit foreign investment in certain sectors,” Gillis wrote in an e- mail about Alibaba’s experience.

Listing Withdrawn

Delaware-incorporated Buddha Steel was forced to withdraw its application for a $38 million U.S. listing in March after officials in northeastern China’s Hebei province said its VIE contravened foreign investment rules. Buddha Steel canceled its contractual relationships with a Hebei-based cold-rolled steel manufacturer after the government’s objection.

Alibaba’s Hong Kong-listed unit Alibaba.com didn’t try to hide the questionable legal status of the VIEs in its 2007 Hong Kong listing prospectus.

“We cannot assure you that the PRC government would agree that these arrangements comply with PRC licensing, registration, or other regulatory requirements,” the company said in describing its risk factors.

‘Different’ Rules

In response to questions about the loss of Alipay, Yahoo founder and Alibaba Group board member Jerry Yang told analysts on May 25 that “based on our own inquiries and various interactions” with the People’s Bank of China, the company had come to believe the regulator was planning a “different” regulatory structure surrounding online payment companies.

Alibaba spokesman John Spelich declined to confirm Alipay Chief Financial Officer Jing Xiandong’s claim, reported by the Nanfang Daily on June 16, that the central bank had asked Alipay for documentation showing that it wasn’t operating under a VIE structure. The PBOC didn’t respond to a faxed request to confirm it had objected to Alipay’s VIE.

In a letter to clients, Shoesmith wrote that Buddha Steel’s experience was probably a one-off occurrence for the very reason that the nation’s Internet “crown jewels” would be affected by any crackdown.