Cover Series: How Didi’s Rush to Raise Funds in U.S. Backfired (Part 1)

As one of the world’s largest ride-hailing companies with 493 million annual active users and 15 million drivers, Didi Global Inc.’s $4.4 billion U.S. initial public offering (IPO) was exceptionally low key.

No bell-ringing ceremony or executive speech took place at the New York Stock Exchange on the June 30 debut. Employees heard the news only several hours after the stock started trading and were told not to discuss the IPO publicly on social media. Didi founder Cheng Wei asked shareholders not to talk to media, an underwriter of Didi’s IPO told Caixin.

The ride-hailing giant’s quiet overseas share sale was followed by a devastating regulatory backlash, raising questions about whether the company received a nod from the domestic authorities in advance.

Warnings from the regulators came as early as April. Just days before the company secretively submitted its application in the U.S. in April, Didi was among 34 internet platform companies summoned by Chinese market regulators and ordered to conduct self-inspections within a month. They were warned of “severe punishment” for any violations. Didi’s core ride-hailing business and new community group buying and freight business all came under the threat of tightened supervision.

Submitting the application in April meant Didi planned to list in the U.S. as early as July, a person close to Didi told Caixin. Even though the U.S. offering didn’t require Chinese regulators’ approval, Didi’s timing was bad since China was in the midst of an extraordinary clampdown on internet platform companies, several people close to China’s regulators said.

Then in the prospectus filed in June, Didi used 60 pages to disclose risks — including that its share sale could be suspended by the China Securities Regulatory Commission (CSRC). The company took a series of steps to lower risks, such as excluding its community group buying business from the listing entity.

Additionally, SoftBank Group, Didi’s largest foreign shareholder with a 21.5% stake, gave up its board seat and returned to its position as only a financial investor, as Chinese regulators have raised concerns about large foreign ownership of Chinese companies. As China’s dominant ride-hailing provider, Didi owns a large amount of data on the country’s urban transportation and users. That means it’s necessary to ensure that foreign shareholders such as SoftBank and Uber Technologies Inc. can’t access the data, a person at a financial intermediary said.

Under the tense environment, Didi didn’t open its IPO to individual investors. Didi sold 317 million shares — about 10% more than originally planned — at $14 apiece. The offering was the second-largest U.S. flotation by a Chinese company, trailing only Alibaba Group Holding Ltd.’s $25 billion IPO in 2014. All of the overallotment was bought by institutional investors, a person close to the underwriters told Caixin.

Didi insiders said that before the IPO they were not aware a potential security review would be started soon, and that they had reported the listing plan to the Chinese authorities.

“If Didi had not received a nod from the CSRC, no investment bank would be willing to take on the deal,” a legal professional close to Didi told Caixin.

With or without approval?

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

The company originally considered a Hong Kong IPO in mid-2020 but later dropped the plan due to concerns that it could face harsher regulatory scrutiny in Hong Kong over business practices such as the use of unlicensed vehicles and drivers. The CSRC didn’t support Didi’s Hong Kong IPO, and a switch to the U.S. would also depend on regulators’ attitude, several financial intermediary people told Caixin.

Didi’s U.S. share sale didn’t require Chinese approval as it offered the U.S. shares through what’s known as a “small red chip” model, a common strategy used by U.S.-traded private Chinese companies. Under this structure, an offshore entity usually incorporated in a tax haven like the Cayman Islandss controls the business operator in China through a complex web of legal agreements.

However, there are uncertainties with respect to the application of China’s merger and acquisition rules to overseas-traded companies, Didi disclosed in its prospectus. The rules require foreign special purpose vehicles that are controlled by Chinese companies or individuals formed for the purpose of seeking an overseas public flotation to obtain approval from the CSRC before the listing. If CSRC approval was required for Didi’s U.S. IPO, any failure to obtain or any delay in obtaining clearance would subject Didi to sanctions, the company said.

Regarding Didi’s IPO, China’s regulators “approved in principle” but raised requirements such as resolving data security issues, a person close the regulators said. Since China and the United States are still negotiating over audits of Chinese companies traded on American exchanges, and Didi’s case involves the risk of data transmission overseas, Chinese regulators would have wanted clear results from negotiation with Didi on these matters before its IPO, the person said.

But the negotiation process could be long and uncertain.

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

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

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

Under the U.S. “Holding Foreign Companies Accountable Act” passed into law last December, foreign businesses traded in the U.S. have three years to comply with domestic accounting and reporting regulations before being kicked off American exchanges. This means Didi would have to provide financial information and data to U.S. regulators.

The ripple effects

Didi’s American depositary shares opened on their debut at $16.65 and rose as much as 29% from the $14 offering price. The shares closed at $14.14 the first day, giving Didi a market value of about $68 billion.

Two days later, China’s Cybersecurity Review Office said it would investigate the ride-hailing service to “prevent data security risks, safeguard national security and protect the public interest.” On Sunday the regulator ordered the Didi app removed from domestic app stores. Then late Friday, China ordered mobile app stores to remove 25 more apps operated by Didi, offering services from carpool to finance, saying the apps illegally collect personal data. The Cyberspace Administration of China also barred internet platforms from providing traffic and downloads for the apps.

The regulatory blows to Didi have caused a ripple effect on other U.S.-traded Chinese companies as well as those seeking overseas offerings. Two more newly U.S.-traded domestic tech companies came under similar investigation by cyberspace regulators. Online recruitment platform Boss Zhipin, run by Kanzhun Ltd., and Yunmanman and Huochebang — two truck-booking apps run by Full Truck Alliance Co. Ltd., also known as Manbang Group — were ordered to stop registering new users while under national security review.

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

Chinese bike-sharing company Hello Inc. and audio app Himalaya have also suspended U.S. IPO plans. Himalaya, which filed its application in April, has dropped the plan and may switch to Hong Kong for a share sale, a person close to the company told Caixin.

Himalaya didn’t respond to a request for comment.

Hello, which competes with Didi’s bike-sharing business and faces similar regulatory risks, also filed an IPO application 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 didn’t respond to a request for comment.

Despite the U.S.-China conflict, many Chinese companies still want to list in New York. Didi’s IPO was seen as jumping the gun, and those still in the race would face a much bumpier road ahead.

This is the first in a series of stories about the regulatory storm that followed Didi's IPO. Click to read part two, part three and part four.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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