Drip Global (ticker: DIDI), China’s largest online car platform, saw its shares plunge more than 25 percent Tuesday after Beijing issued a cybersecurity investigation into it and took down its app, while nearly all Chinese stocks fell along with it. Legal scholars told Voice of America that existing U.S. law does not protect U.S. investors in mid-cap stocks from being caught in the crossfire; investment experts urged investors to stay away from mid-cap stocks.
Drip Global stock fell 20 percent in early trading Tuesday and fell as deep as 21 percent after midday, before rebounding 15 minutes before the close to finish down 19.58 percent, or $12.49 per share.
Major Chinese stocks such as Alibaba, Tencent, Baidu, Jingdong and Weibo were among those that fell, along with two other companies listed in June that were the subject of an investigation announced by Beijing: Man Gang (ticker: YMM), a platform that helps connect shippers and truckers, and Boss Direct (ticker: BZ), a job search platform. BZ) fell 6.6 percent and 15.9 percent, respectively.
On June 30, Drip Global listed on the New York Stock Exchange at $14 per share and ended the day with a slight gain of $14.17.
On July 2, China’s Internet Information Office announced a cybersecurity review of Drip, saying it would suspend new Drip user registrations while authorities conduct the review. Drip’s stock price closed down 5.3% on the same day.
On July 4, China’s Internet Information Office said the company had committed serious violations in its collection and use of personal information, then ordered the app to be removed from the store.
On July 5, the Chinese government announced that three other Chinese platforms, two of which are listed in the U.S., would also suspend new user registrations.
Drip faces multiple class action lawsuits worldwide
As of Tuesday, four U.S. law firms had taken action against Drip Global in connection with legal claims.
Labaton Sucharow LLP, a U.S. law firm representing investors’ rights, issued a notice to Drip shareholders on July 2 that it will investigate claims on behalf of Drip shareholders following the announcement of a cybersecurity investigation into Drip by the Chinese government’s cyber administration. The law firm said that Drip shareholders can contact the firm for further information and to protect their investment.
New York-based Rosen Law Firm issued a notice on July 4 “encouraging loss-making DDT global investors to consult a class action investigation.
The Los Angeles-based Schall Law Firm said July 5 that its investigation will focus on “whether the company issued false and/or misleading statements and/or failed to disclose information relevant to investors.”
Glancy Prongay & Murray LLP, a national class action law firm also based in Los Angeles, issued a notice July 6 that it will “continue its investigation on behalf of DDT investors regarding possible violations of the federal securities laws by DDT and its officers.”
More U.S. law firms are expected to follow up on the claims.
The key question is whether DDT received prior oral or written warnings from the Chinese government about the investigation, and “if you do receive a warning from the government before you go public, legally you have to disclose it to all of your investors as quickly as possible.” Guo Yafu, head of New York-based Tianjiao Asset Management, told the Voice of America.
But if Drip didn’t receive any warnings before the IPO, “then he’s not liable,” Guo Yafu said. “Drip actually spells all of this out very clearly in the exclusion of risk clause.” Guo Yafu, who read the Drip’s IPO prospectus, said. “Specifically, access to personal information may not be as easy in the future, and government management will be stricter,” Guo Yafu added.
Jim Cramer, a mainstream U.S. financial television host, said today that the failure of Drip Global after its initial public offering could permanently change the attitude of U.S. investors toward Chinese companies seeking to list on Wall Street.
“If you buy Chinese stocks after this, you’re an idiot. You’re an idiot. I don’t care if it catches on,” Kramer said on his show Tuesday. “Why do you need to put your money at risk after this?”
Current U.S. Law Can’t Protect Chinese Stock Investors from Chinese Policies
Jesse Fried, a professor at Harvard Law School, told Voice of America on Tuesday that under current law, U.S. regulators cannot protect U.S. investors from the negative effects of regulatory actions taken by China that harm Chinese companies listed in the United States.
“In theory, the U.S. could ban Chinese companies from listing in the U.S., but as long as those companies provide adequate disclosure in their initial public offerings (IPOs), the SEC does not have the authority to do so.”
Last December, former President Donald Trump signed the Foreign Company Accountability Act (HFCAA), which mandates that Chinese companies listed in the U.S. will be delisted from U.S. exchanges if they fail to meet U.S. audit standards for three consecutive years.
Drip is China’s largest online car-hailing platform, accounting for the vast majority of the country’s online car market. The Chinese government wants to clean up Drip’s cybersecurity problems, so why not stop its initial public offering from happening before it comes to the U.S.?
Fried said he doubts China would care about causing losses to U.S. investors. “That’s why it can behave very aggressively toward U.S. public companies. If Drip were to go public in China, Chinese regulators would be more cautious in containing Drip because they would be worried about a backlash from Chinese investors.”
Chinese companies hoping to list in the U.S. now face the daunting task of selling their shares to possible investors, Bloomberg said. “With Beijing investigating Drip Global, China’s version of Uber, and two other Chinese companies that recently debuted on Wall Street, global equity managers are questioning whether this regulatory threat from China’s increasingly tight control of big data is still worth the risk of investment.”
34 more Chinese companies ready to come to the U.S.
As many as 34 Chinese or Hong Kong companies have announced this year that they are preparing to list in the U.S. now pending approval, according to Bloomberg News, and Beijing’s latest crackdown on the tech sector could dampen investor sentiment. “Such deals have been taking place at a record pace, with IPOs listed in New York so far this year reflecting a market value of more than $15 billion.”
The New York Times said DDT, China’s largest online car platform, has gone from investment darling to the biggest new target of Beijing’s rapid action to fix the domestic Internet industry. “The action sends a clear message: the government has the right to regulate them, even if they operate globally and even if they are listed overseas.”
China has accelerated its crackdown on its own Internet giants after the initial public offering of fintech giant and Alibaba’s sister company Ant Financial Services was called off last year.
The financial newspaper Barron’s reports that this Chinese government purge of tech companies is still underway. The paper quotes Chinese regulators as saying that the government “will tighten rules allowing Chinese companies to list overseas and revise its approval process for initial public offerings, which could block the possibility of large Chinese IPOs like the just-completed one for ride-hailing platform Drip Global.”
Barron’s quoted Wenyan Ma, an adjunct professor at New York University School of Law, as saying, “The increasing scrutiny of data could spill over to other U.S.-listed Chinese companies, and higher compliance requirements from both China and the U.S. could result in more Chinese tech companies remaining in the country.”
Too much policy risk for Chinese stocks
“The policy risk for Chinese stocks is too high,” said Guo Yafu. “Today it’s DDT, yesterday it was Ali, the day before yesterday it was Good Future (ticker: TAL), New Oriental (ticker: EDU), and the day before the big one it was Meituan (ticker: MPNGY), which also got fixed a little bit, and in short, the Chinese government stepped up regulation of these companies, so who would want investors to hold these stocks when that regulation is on their head? “
Guo Yafu believes that the failure of DDT’s initial public offering will have consequences for the entire Chinese stock market, and indeed the Chinese capital market. “From the point of view of the entire Chinese stock market, the drop has been added to the entire Chinese stock market, to the confidence of the Chinese stock market and splashed cold water, especially in the U.S. stock market, Nasdaq even record high stock market situation, while the Chinese stock market in a record low, which has caused a harm to the entire Chinese capital market.”
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