(Beijing) – A U.S. congressional commission recently published a report that has been the topic of much discussion in China.

The report was published by the U.S.-China Economic and Security Review Commission, whose website says its job is to report on the national security implications of Sino-U.S. economic ties.

The commission recently issued a report warning investors about the risk of investing in U.S-listed Chinese Internet companies, and the timing of its release is noteworthy because e-commerce giant Alibaba Group Holding Ltd. is about to go public on the New York Stock Exchange, a listing that some expect to be the largest in U.S. history.

News articles on Chinese websites covering the report view it through the lens of how Alibaba's planned IPO will be affected. Some analysts said the huge scale of Alibaba's stock offering prompted the commission to highlight risks that many other Chinese companies present, but go unnoticed by the U.S. public.

One analyst said the report was motivated by U.S. e-commerce companies feeling threatened by Alibaba, which is making inroads in the United States.

Here's a look at what the report says about the risks associated with Alibaba Group and other companies and what it means.

What does the report say?

The report to the U.S. Congress, dated June 18, warns investors about the risk of putting their money in U.S.-listed Chinese Internet companies. It used Alibaba Group and Sina Corp.'s Weibo, China's version of Twitter, to demonstrate the perils their obscure corporate structures present. Investors have been lured to such firms despite the risk because of high returns, the report says.

It concludes that the problems were fundamentally caused by China's overly restricted financial markets and the government's requirement that Internet companies be majority owned by Chinese nationals. It also says U.S. investors are not adequately protected because rule of law in China is underdeveloped.

Why is the VIE structure cited as a prominent risk?

The report focuses on the use of variable interest entity (VIE), an arrangement commonly used by Chinese Net companies to work around domestic policy restrictions and list overseas.

A typical VIE structure involves an overseas-incorporated entity that controls a domestic business not through equity ownership but an array of agreements. Foreign investors invest in the overseas holding company because they are often barred from directly holding shares in the business the domestic firm is in.

The report says the VIE structure is a "complex and highly risky scheme of legal arrangements" designed for Chinese companies to circumvent domestic regulations restricting foreign share ownership in certain industries that the government considers important.

Investors should be wary of the structure because it is fragile, the report says. The contracts, which are key to protecting investor interests in the VIE arrangement, exist between the Chinese subsidiary of the foreign holding company and the firm that controls the main operations in China. Both parties are covered by Chinese law only, so the agreements between them are binding and enforceable only to the extent that Chinese courts are willing to uphold them.

This is a cause for concern particularly because "rule of law remains rudimentary" in China, the report says. Also, the Chinese government has been ambiguous in its attitude toward the VIE structure, creating more uncertainty.

What else should U.S. investors watch for?

The report also urges U.S. investors to beware of the risk of Chinese Net companies engaging in corrupt practices. For example, employees of Chinese Net enterprises have been caught taking bribes to help companies avoid bad publicity.

Listing in the United States brings the companies under the jurisdiction of the U.S. Foreign Corrupt Practices Act, and means they can be held accountable and punished even for acts of graft that take place outside the United States.

Why did the report use Alibaba as an example?

Alibaba has a bad track record both in terms of using the VIE structure and its employees being involved in corruption scandals. It is going public in New York using a VIE structure. To mitigate investor concerns, Alibaba said in its prospectus that it will make the foreign-owned part of its business hold most of its assets aside from those including licenses that must be held by a Chinese entity.

The firm's co-founder, Jack Ma, caused an uproar in 2011 when he ignored the objections of foreign shareholders and severed the VIE link between Alibaba and Alipay, an extremely popular e-payment tool in the country. Ma said he did so to ensure Alipay can get its payment license. The incident served as a reminder of how little influence foreign shareholders have over the management of a VIE.

Alibaba was also embroiled in a scandal in 2012, when Yan Limin, former general manager of Alibaba's group-buying business, was arrested for taking bribes in exchange for doling out favors. He was sentenced to seven years in prison. Several other Alibaba employees were found guilty of similar crimes.

What is the purpose of the report?

The document says that "If U.S. investors continue to buy into such Chinese VIE schemes and the system collapses, the scenario could be akin to the 2001-2011 Chinese reverse-merger debacle that cost U.S. investors an estimated US$ 18 billion."

But the stark warning will not scare away U.S. investors, says Liu Fang, a lawyer based in the United States who serves Chinese firms planning to list in America. While some retail investors might be discouraged by the risk factors, "large institutional investors have their own procedures for analyzing risk and return and will not let a report tip the scale at weighing costs and benefits," she said.

"What the report really wants to say is that the U.S. capital market is open to China and but China's market is closed to the U.S.," Liu said.

By drawing attention to the underlying problems, including restrictions on foreign investments in certain sectors and inadequate legal protection, the report is actually exerting pressure on the Chinese government to respond to the concerns of the United States, she said.