I am a really confused about what ADR investing in China based stocks from within the US really is. My understanding is that a third party company opens an offshore account in a place like the Caymen Islands.
So the investor is basically investing in the Caymen Islands partner who owns shares in the Chinese business. They then agree to share a portion of the shares or profits with the investors based on the amount invested.
That is what I thought it was but then I see articles saying that the partner owns no shares and agrees to share profits. So isn't that the same thing a share of the profits based on shares of Chinese stocks sold?
What is to prevent this third party partner in the Caymen Islands from keeping the profits for themselves, making up fake statements for clients or going bankrupt? Where is the protection? Who would an investor complain to?