Key Points To Note:
- The SEC charged cloud services provider Cloopen with false financial reports and praised its cooperation during the investigation.
- In efforts to revitalize, the company has undergone a significant board overhaul but still faces challenges amidst intensified competition and China’s economic downturn.
By Doug Young
It was February 2021 when China’s cloud services market had high hopes and expectations with Cloopen Group Holding Ltd.’s New York IPO, collecting $320 million. However, shortly after its disclosure in May 2022 of up to 30 million yuan ($4.2 million) in fake sales, the company’s stocks suffered a severe downturn.
Now, Cloopen is striving to move past its tainted history following a newly announced settlement of fraud charges leveled against it by the U.S. Securities and Exchange Commission (SEC). The company aspires to follow a similar path to the scandal-tainted Luckin that faced an even larger fraud case and shock Wall Street in 2020, triggering the SEC’s crackdown on new Chinese IPOs from 2021.
Cloopen’s case also has implications for Dada Nexus, a courier services provider, which admitted to similarly falsifying its financial records recently.
All three cases are noteworthy as the fraud was discovered through internal audits, indicative of the SEC’s limited access to these companies’ internal records in China. However, this changed in 2022 with a landmark information-sharing agreement between the SEC and its Chinese counterpart.
After weighing these developments, foreign investors should take solace in the increasing reliability of financial reports from U.S.-listed Chinese companies. However, it remains uncertain if companies like Cloopen, Luckin, and Dada Nexus will be absolved for their misdeeds and permitted to return to the primary exchanges on Wall Street.
Luckin and Cloopen currently traded in over-the-counter platforms after their previous delisting from the Nasdaq and New York Stock Exchange, respectively. Dada Nexus remains on the Nasdaq but may face pressure for delisting if it fails to file its annual reports amidst its accounting woes. As for Cloopen, the company is still evaluating its next steps.
While being accused of fraud isn’t favorable, Cloopen’s settlement terms appear as good as the circumstances allow. The SEC refrained from fining the company due to its full cooperation during the investigation. This is distinct from Luckin, which was fined $180 million in 2020 for overstating its 2019 revenue by as much as 2.2 billion yuan – equal to about 40% of its expected annual sales at the time.
Positive Feedback from the SEC
Truth be told, the SEC was quite praiseworthy of Cloopen for its handling of the matter. It documented, “The SEC determined not to impose civil penalties against Cloopen because the company self-reported its accounting issues, cooperated extensively with the staff’s investigation, and undertook prompt remedial measures.” The investigation found that “facing pressure to meet strict quarterly sales targets, two senior managers directed their employees to improperly recognize revenue on numerous contracts for which Cloopen had either not completed work or, in some instances, not even started work.”
The SEC’s favorable stance holds significant weight as the New York Stock Exchange will likely consider it when Cloopen attempts to relist its shares in the future. Currently, the stock trades at just $0.0002 and has remained below one cent since last June when its delisting was announced.
Since then, the company has been endeavoring to reconcile with the SEC and stabilize its operations. A significant move was the resignation of five board members, including the relinquishing of the chairman’s position by CEO Sun Changxun, in December. Significantly, however, Sun, Li, and Xiong all retained their positions in the company despite leaving the board, which is unlike Luckin, where the top two officials were ousted after the fraud. Luckin has since undergone a revamp and has won back investor confidence with a significant rise in its shares since 2020.
Opting for a Cloopen relisting is contingent upon convincing investors of its reformed nature, a challenging task amidst the company’s waning growth and the broader economic slump in China. Additionally, U.S. export restrictions could impede the sector, as evidenced by Alibaba’s recent decision to halt its cloud division’s spin-off due to these limitations.
Overall, Cloopen’s outlook remains uncertain. The SEC’s positive feedback could facilitate a potential relisting on the condition that the company demonstrates a sustainable future. Yet, it must overcome challenges posed by the current economic climate and retaining its original management team.
This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
