A grocery delivery courier from Missfresh drives past the offices of the Chinese ridesharing company Didi. Both companies went public in the United States in June 2021.
Gilles Sabrie | Bloomberg | Getty Images
BEIJING – For investors in Chinese IPOs like Didi, reading the fine print is becoming more important to avoid losses.
The ride-hailing app Didi – also known as “Uber of China” – raised $ 4.4 billion in the largest US IPO of a Chinese company since Jack Ma’s e-commerce giant Alibaba went public in 2014.
Two days later, Didi’s shares fell 5.3% after Chinese regulators announced a cybersecurity investigation into the company that suspended new user registrations. On Sunday, the agency then ordered Chinese app stores to remove Didi’s main app for privacy reasons. Existing customers can continue to use the ride hailing app.
While many US investors may never use Didi or know a lot about China’s regulatory environment, the company – and other Chinese IPOs – posted some warning signs in their prospectuses filed with the SEC prior to the IPO.
On the second page of a section titled “Risks Associated with Doing Business in China,” Didi said it had two meetings with regulators as well as industry peers in April and May. The company warned that in either case it could not ensure that compliance efforts would satisfy regulators.
The government realized that internet companies, especially internet giants, were becoming too powerful to comply with the regulations.
Prospectus Avenue Capital
In addition, Didi said in its prospectus that it “has not received the required permits for all cities where we are required to do so” and “not all drivers on our platforms have gone through the process to obtain the required licenses in each city that we work in. “
“The rules are there, but the internet companies usually ignored those regulations and (venture capital firms) ignored the compliance issues,” said Ming Liao, founding partner of Beijing-based Prospect Avenue Capital, which is worth $ 500 million managed. The company expects some of its invested companies to be listed in the US this year.
Before going public, Didi was valued at $ 62 billion as one of the five largest private startups in the world, according to CB Insights.
Goldman Sachs Asia, Morgan Stanley and JP Morgan were among the investment banks that signed Didi’s initial public offering, while SoftBank was a major investor according to a filing.
However, Didi has not disclosed all aspects of its business in China, such as its financial technology division.
Tightened regulations last year
Risks to Investors
In the run-up to the Full Truck Alliance’s IPO, the company disclosed a history of data protection violations in its prospectus. Chief Zhipin said there could be fines of up to 10,000 yuan (US $ 1,562.50) per office rent if the agreements are not registered under Chinese law.
The above three companies also discussed the general uncertainty surrounding the Chinese government’s actions, increasing scrutiny of monopoly practices, and tensions between the US and China.
Another risk for investors is that founder managers typically retain a large majority stake in US-listed Chinese companies.
Didi’s two co-founders, Will Cheng and Jean Liu, together hold 58.1% of the total voting rights. Boss Zhipin’s founder, Peng Zhao, had 76.2% of the voting rights and Full Truck Alliance’s founder, Peter Zhang, had 83.4%, as the filings showed.
While analysts said China’s lax regulatory environment has allowed startups to experiment and grow rapidly, the lack of enforcement has also attracted speculators and allowed business practices that sometimes come at the expense of consumer savings or safe working conditions.
Meanwhile, differences in regulation and language have allowed some Chinese companies to raise money in the US with less investor scrutiny and understanding that a US company may face.
Cases of fraud
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Now both countries are tightening regulation.
“In the future, similar companies could go through a lengthy regulatory review process for (an) IPO,” said Ma, co-author of The Hunt for Unicorns: How Sovereign Funds Are Reshaping Investment in the Digital Economy.
What this could mean for Chinese IPOs
The tightened regulatory measures will likely slow the onslaught of Chinese IPOs in the US, analysts said.
Chinese companies have loudly requested to be listed in New York, often for branding purposes, regardless of US-China tension. Last year, 30 China-based IPOs in the US raised the most capital since 2014, according to Renaissance Capital.
According to a representative of the New York Stock Exchange, around 60 Chinese companies were planning to go public in the United States this year at the end of April. An update was not available as of Tuesday.
Another Chinese company that went public last week, the food delivery company Dingdong, cut its supply by 70% following the bad debut of industry rival Missfresh a few days earlier.
Each prospectus lists more than 35 points on which companies “fail to assure investors” growth and various aspects of business success.