Convertible preferred stock : testing the legal framework of the U.S. venture capital model in China

Convertible preferred stock is a risk-mitigating security integral to the success of venture capital (VC) investment strategy in the United States (U.S.). Its function in protecting ownership rights and illiquid investment, as well as facilitating the sale of the portfolio company has attracted the attention of the People’s Republic of China (PRC or China) that has implemented its own convertible preferred stock provisions in search of similar gains. Importantly, the PRC lacks the institutional stronghold of the U.S. – stringent securities regulations and a stock market centered economy - which provides an optimal environment for convertible preferred stock. Despite this, VC analysts unidirectionally support the U.S. model as a template for the PRC without explaining the addition of the provisions as needed law in China’s VC systems. This thesis rethinks the ‘ivory tower’ approach of the U.S. VC model and addresses a missing link in the literature: the tension between what is borrowed from Western structures for the formation of convertible preferred stock and domestic PRC market needs. Through the consideration of law as an instrument of policy, I argue that the party-state’s incremental implementation of convertible preferred stock provisions reflects Western expressions of economic autonomy while also reflecting counteracting socialist goals of state supremacy. This tension provides academic insight into VC and securities laws previously unexplored by the literature, particularly valuable in light of the U.S. and PRC’s status as competing super economies in our modern world.Law, Faculty ofGraduat