Online education is a booming business in China, and regulations are catching up, very slowly, says China-lawyer Mark Schaub in a thorough overview of the legal minefield for online educational ventures at the China Law Insight. “Curiously for a business that combines two highly sensitive areas of the Chinese economy – the internet and education – online education was only first officially addressed in 2018.”
The past five years witnessed a boom in the online education sector in China with annual revenues increasing from RMB 122.54 billion in 2015 to RMB 269.26 billion (forecast) in 2019. The rapid expansion is attributable to consumers’ love of the internet, the continued growth of the middle class combined with the high regard in which education is held in China.
However, the online education regulatory regime has not matched the sector’s speedy development. The regulations remain fragmented and spread across a variety of regulations that govern online activities more generally.
Curiously for a business that combines two highly sensitive areas of the Chinese economy – the internet and education – online education was only first officially addressed in 2018.
To some extent the PRC regulators are catching up as they have issued a slew of regulations in order to better regulate online education. The regulations acknowledge the hybrid nature of online education as a number of different authorities are cooperating in building the regulatory framework. …
Despite the rigid regulations outlined above there are many large education companies that are very active in online education in China. Some have operated an offshore model, but most have adopted a VIE model.
The VIE model is where a foreign company arranges for domestically incorporated entities to be held by nominees and which are controlled by the foreign company by means of contractual arrangements. Under a VIE structure, the “controlled” domestic company obtains the requisite licenses to operate the business. The contractual arrangements typically include exclusive service agreements which allow the finances of both entities to be consolidated under GAAP accounting rules.
VIE structures are also used by foreign investors who wish to circumvent restrictions on operating in China in restricted or prohibited sectors (such as online, education and online education!).
It has long been considered that VIE structure is a “grey” area of Chinese law as it has never been tacitly approved by the PRC authorities and there have been some cases where the domestic company decided to not fulfill its obligations under the contractual arrangement and when taken to court it was ruled that such contractual arrangements were unenforceable as they were intended to circumvent PRC regulatory requirements.
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