How Didi’s rush to raise money in the US backfired

As one of the largest ridesharing companies in the world, with 493 million annual active users and 15 million drivers, Didi Global’s initial public offering (IPO) of US $ 4.4 billion was exceptionally discreet.

No ringing ceremony or executive speech was held at the New York Stock Exchange on June 30. Employees did not learn the news until several hours after the stock began trading and were told not to publicly discuss the IPO on social media. Didi founder Cheng Wei has asked shareholders not to speak to the media, a Didi IPO underwriter told Caixin.

The ride-sharing giant’s overseas sale of shares was followed by a devastating regulatory backlash, raising questions as to whether the company had received a nod from domestic authorities in advance.

Warnings from regulators came in as early as April. Just days before the company secretly submitted its application to the United States in April, Didi was among 34 internet platform companies summoned by Chinese market regulators and ordered to conduct self-inspections within one. month. They were warned of a “severe punishment” for any violation. Didi’s core business, carpooling and the new group buying and community freight business, have all been threatened with increased surveillance.

Submission of the application in April meant that Didi planned to register in the United States as early as July, a person close to Didi told Caixin. Even though the U.S. offer did not require approval from Chinese regulators, Didi’s timing was bad as China was in the midst of an extraordinary crackdown on internet platform companies, several people close to Chinese regulators said.

Then, in the prospectus filed in June, Didi used 60 pages to disclose the risks – including the fact that its sale of shares could be suspended by the China Securities Regulatory Commission (CSRC). The company has taken a series of measures to reduce risk, such as excluding its community group purchasing business from the listing entity.

In addition, SoftBank Group, Didi’s largest foreign shareholder with a 21.5% stake, relinquished its seat on the board of directors and returned to its position as sole financial investor, as Chinese regulators announced their concerns about the large foreign ownership of Chinese companies. As the leading provider of ridesharing services in China, Didi has a large amount of data on urban transport and users in the country. This means there is a need to ensure that foreign shareholders such as SoftBank and Uber Technologies cannot access the data, said a person from a financial intermediary.

In a tense environment, Didi did not open its IPO to private investors. Didi sold 317 million shares – about 10% more than initially expected – at $ 14 apiece. The offering was the second-largest IPO in the United States by a Chinese company, behind Alibaba Group Holding’s $ 25 billion IPO in 2014. The entire over-allotment was bought by investors institutions, a person close to the subscribers told Caixin.

Didi insiders said that prior to the IPO, they were unaware that a possible safety review would be launched anytime soon and that they had reported the listing plan to Chinese authorities.

“If Didi had not received approval from the CSRC, no investment bank would be ready to accept the operation,” a lawyer close to Didi told Caixin.

With or without approval?

Regulatory authorities involved in Didi’s registration include the Ministry of Transportation, the Ministry of Industry and Information Technology, the Cyberspace Administration of China, and the CSRC.

The company had initially considered an IPO in Hong Kong in mid-2020, but later abandoned the plan over concerns that it would face stricter regulatory scrutiny in Hong Kong regarding business practices such as the use of vehicles and drivers without a license. The CSRC did not support Didi’s Hong Kong IPO, and a move to the United States would also depend on the attitude of regulators, several financial intermediaries told Caixin.

Didi’s sale of US stocks did not require approval from China, as it offered US stocks through what is known as a “little red chip” model, a common strategy used by companies. Chinese private companies listed in the United States. Under this structure, an offshore entity typically incorporated in a tax haven like the Cayman Islands controls the commercial operator in China through a complex web of legal agreements.

However, there are uncertainties over the application of China’s M&A rules to overseas listed companies, Didi revealed in his prospectus. The rules require foreign special-purpose vehicles controlled by Chinese companies or individuals trained to seek an overseas IPO to obtain approval from the CSRC before listing. If CSRC approval was required for Didi’s IPO in the United States, any failure or delay in obtaining clearance would subject Didi to sanctions, the company said.

Regarding the Didi IPO, Chinese regulators “approved in principle” but raised demands such as addressing data security concerns, a person close to the regulators said. Given that China and the United States are still negotiating audits of Chinese companies traded on U.S. exchanges, and Didi’s case involves the risk of overseas data transmission, Chinese regulators would have liked clear results of negotiating with Didi on these matters prior to its IPO, the person mentioned.

But the negotiation process could be long and uncertain.

“Didi went ahead without waiting for a clear solution from the regulators, leaving Chinese and US regulators and the market in a bad position,” the person said.

Didi collects large amounts of real-time mobility data every day. It generates an average of 41 million daily transactions, of which about three-quarters are in China, according to the prospectus.

Additionally, the company obtained a high-level license in 2017 in surveying and mapping, and its high-resolution maps include a massive amount of geographic and location data.

Under the U.S. Holding Foreign Companies Accountable Act enacted last December, foreign companies traded in the United States have three years to comply with national accounting and reporting regulations before being kicked off U.S. stock exchanges. This means that Didi would have to provide information and financial data to US regulators.

The ripple effects

Shares of Didi’s US custodian opened at first at $ 16.65 and rose 29% from the offering price of $ 14. The shares closed at $ 14.14 on the first day, giving Didi a market value of around $ 68 billion.

Two days later, China’s Cyber ​​Security Review Bureau said it would investigate the ridesharing service to “prevent data security risks, protect national security and protect the public interest.” On Sunday, the regulator ordered the removal of the Didi application from national app stores. China on Friday evening ordered mobile app stores to remove 25 other apps operated by Didi, offering services ranging from ridesharing to finance, saying the apps illegally collect personal data. The Chinese Cyberspace Administration has also banned internet platforms from providing traffic and downloads for applications.

Regulatory blows to Didi have had a ripple effect on other Chinese companies listed in the United States as well as those seeking overseas offerings. Two other newly traded national tech companies in the United States have been the subject of a similar investigation by cyberspace regulators. Online recruiting platform Boss Zhipin, run by Kanzhun, and Yunmanman and Huochebang – two truck booking apps run by Full Truck Alliance, also known as Manbang Group – have been ordered to stop register new users while undergoing a national security review.

Manbang went public last month, raising $ 1.6 billion. The stock fell 16% from its IPO price.

Chinese bike-sharing company Hello and the Himalaya audio app have also put their plans for an IPO in the United States on hold. Himalaya, which filed its request in April, has abandoned the plan and could move to Hong Kong for a stock sale, a person close to the company told Caixin.

Himalaya did not respond to a request for comment.

Hello, which competes with Didi’s bike-sharing business and faces similar regulatory risks, also filed for an IPO with the U.S. Securities and Exchange Commission in April, but the deal has been postponed, a source with direct knowledge of the situation told Caixin. The company did not respond to a request for comment.

Despite the US-China dispute, many Chinese companies still want to be listed in New York. Didi’s IPO was seen as a show jumping, and those still in the race would face a much bumpier road.

Also read the original story. is the online news portal in English of the Chinese financial and business news group Caixin. Nikkei recently agreed with the company to exchange items in English.

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