Here's why we need a rethink on tech giant

When Alibaba, China's giant online sales platform, announced it had selected the New York Stock Exchange for its initial public offering (IPO) this summer, the stock exchange cheered. It heralded its selection as a major win not only over rival exchanges in the United States, but also over rival markets abroad. And why not? Alibaba's IPO is estimated to value the company around $160 billion, making it one of the most highly valued tech companies in the world.

However, here is why a rethink is warranted: In a troubling sign for the US financial market and the NYSE's slippery standards, it is important to know that the NYSE was not Alibaba's first choice. In fact, Alibaba wanted to launch its IPO on the Hong Kong Stock Exchange. But that plan was squelched when the HKSE informed Alibaba that the way the company was structured did not meet its listing requirements.

The way in which Chinese Internet companies are structured represents considerable risks for foreign investors. Alibaba, social networking giant Weibo and several other Chinese Internet companies use a complex legal mechanism in which ownership is deliberately obscured by a series of shell companies. Weibo, for example, uses a Cayman Islands corporation that owns 100 percent of a Hong Kong enterprise that controls the company through three layers of Chinese entities. Alibaba has a similar structure, and that is what made it run afoul of HKSE regulations.

Using such an intricate structure is a ruse. The purpose is to make the company appear to be Chinese-owned to Chinese regulators, and foreign-owned to foreign investors, when in fact neither claim is technically correct. Such a structure is not only very risky, but could also be considered illegal in China.