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Chapter 310 0307 [Pre-IPO Inquiry]

Entering May, the entire management team of ByteDance got busy.

This includes not only routine management, but also drafting the registration instructions.

All members of the management team, including Chen Guiliang, are required to be deeply involved, providing detailed descriptions of the business model, market, competition, technology, operations, etc., in the registration prospectus, as well as explaining the financial performance and status. This includes the background, salaries, and shareholdings of management and major shareholders, and plans for how the funds raised from the IPO will be spent.

They also need to disclose the various risks that their company faces.

"The VIE risks are not clearly stated, Mr. Chen, please don't be so vague." The Chinese and American legal teams collectively presented the brochure to Chen Guiliang for revision.

Chen Guiliang was speechless.

He had already written about the risks of the VIE structure, but the lawyer still thought it was too vague.

Does the registration document state that China issued Commercial Document No. 10 last year, requiring VIE structures to be registered with the Chinese government, and that the Ministry of Commerce would absolutely not approve such a document? Therefore, does this mean we are operating illegally by concealing our actions from the Ministry of Commerce?

Lu Zhihui stated, “Everything must be clearly stated. That is, we control our Chinese operating entity through contractual arrangements, not direct equity. If this arrangement is deemed invalid or unenforceable, it could lead to business termination or zero value. Then, the core risk points must be explained in detail, including the fact that Chinese regulatory authorities have never formally recognized the legality of the VIE structure…”

It's like taking off your underwear and letting American inspectors see it.

Although the Ministry of Commerce issued Document No. 10 last year, which included a provision explicitly targeting the VIE structure, actual supervision has not been strict. The official attitude is "not to recognize, not to encourage, and not to ban," and the government has been tacitly approving and observing such listed companies.

The regulatory oversight was later strengthened because of the defaults that occurred overseas.

In 2011, Alibaba spun off Alipay from its VIE structure and transferred it to a wholly domestically owned company controlled by Jack Ma. The stated reason was to obtain a third-party payment license issued by the People's Bank of China.

This can be interpreted as: Jack Ma unilaterally breaking the agreement with the investors!
This triggered a crisis of confidence in the VIE structure in the international capital market, causing Chinese concept stocks to collectively plummet in price.

Only then did relevant Chinese authorities begin to strengthen oversight.

The real tightening of policies happened during the pandemic, which was intertwined with the US-China rivalry!

With the assistance of the listing officer and lawyers from both China and the United States, Chen Guiliang and ByteDance executives repeatedly revised the registration prospectus.

During this period, the report was also sent to Goldman Sachs, the investment bank underwriter, for further suggestions and revisions. Goldman Sachs' advice was particularly crucial when outlining the underwriting details.

This document underwent repeated revisions over the past two weeks before it was finally submitted to the SEC for review.

The SEC will continue to question Chen Guiliang, raising various issues and requiring him to explain, clarify, or supplement his statements.

If all goes well, it will be done in a few weeks.

If things don't go smoothly, it can drag on for several months.

……

"Damn it, the first question they asked was so harsh!" Chen Guiliang was speechless when he saw the comment.

Every year, Chinese companies go public in the US, so this question is completely unnecessary: ​​If China were to legislate against VIEs, would you admit that the stocks would be worthless?
Chen Guiliang asked the lawyer, "How should I answer?"

The lawyer stated, "Different companies have different ways of responding. If a company has state-owned shareholders, it can provide a letter of endorsement from those shareholders. Basically, they'll give whatever is most advantageous, and they're unlikely to give a direct answer. ByteDance can send documents regarding the official honors it has received and the policy support it has received."

Lu Zhihui said, "I had my lawyer prepare all those documents. Including the fact that Renren.com recently cooperated actively with the authorities and received the 'Outstanding Chinese Cultural Website' award. The awarding organization is of a very high level, which is very useful when answering questions from the Americans."

Chen Guiliang never expected that the "awards" issued by the authorities could actually be used to deal with the Americans.

Lu Zhihui added, "Furthermore, I have prepared some case studies of VIE-structured companies going public, as well as official praise from the Chinese government for those listed companies. The questioners are asking these kinds of questions to shirk their own responsibility. They are actually impatient to ask again and again."

There wasn't just one problem; a whole host of them were raised.

It took the lawyer five whole days to prepare all the response documents. Just as they were about to send them to the other side, they suddenly discovered that the EDGAR system had crashed.

This is the official electronic database system of the U.S. Securities and Exchange Commission.

Back in 2007, I was on the verge of a breakdown every few days.

So they resorted to the old method—faxing!
"If all goes well, the SEC will issue a second round of follow-up inquiries next week, through telephone questioning and an EDGAR comment letter. I have already made a list of the questions that may be asked by phone, and Mr. Chen can consult the legal team if he has any questions."

Lu Zhihui said, "I need to fly to the United States to discuss other matters with Goldman Sachs. Later in the questioning process, we also need to arrange rehearsals for the roadshow."

"Thanks for your hard work."

Another week has passed.

The SEC's calls were repeatedly transferred, and Chen Guiliang and his lawyer waited patiently. Once connected, in addition to verifying Chen Guiliang's identity, they also needed to verify the lawyer's. All of Chen Guiliang's answers to the questions required written confirmation from the lawyer.

The first question from the other side was one that wasn't on Lü Zhihui's list: "Your Renren.com uses a real-name registration system and, as required by Chinese authorities, requires student users to fill in their ID card numbers. You've collected the ID card numbers of tens of millions of students, yet you haven't disclosed in your F-1 application whether this complies with the U.S. Children's Online Privacy Protection Act. Are you aware that providing services to users under the age of 13 requires parental consent?"

Upon hearing this question, both the Chinese and American lawyers exchanged bewildered glances.

Chinese lawyers are completely unaware that such a law exists in the United States.

However, American lawyers believe that since Xiaonei.com is in China, it doesn't need to comply with US children's laws, except for financial documents.

Therefore, in the registration statement that was revised many times, neither country's lawyers disclosed the relevant issues.

Chen Guiliang had to deal with it himself: "The users of Renren.com are mainly college students, with a portion being high school students. There are very few users under the age of 13. Once discovered, we will ask their guardians to provide written permission, otherwise we will ban their accounts."

After Chen Guiliang makes this call, he will get the school's intranet to take action.

The officer said, "You need to include this in your F-1 filing."

Chen Guiliang said, "This was our oversight, and we will definitely make corrections."

The consultant then posed a critical question for Web 2.0 companies: "Neither Xiaonei.com nor HaiNei.com has a mature profit model. Please explain how they plan to generate profits in the future?"

Chen Guiliang said, "Our website's revenue has been increasing. In particular, the number of users who recharge their memberships and purchase virtual items has continued to grow. The SP business is also developing rapidly, with ringback tones and microblog revenue increasing explosively... In addition, we are also developing a precise advertising system. These are disclosed in the F-1 filing."

The questioner said, "Your two websites are very similar to Facebook. Facebook can't target ads precisely, and even portals like Yahoo can't. Why can you?"

This is nonsense; the registration instructions already clearly state the relevant information.

This is clearly discriminatory against Chinese companies!

Chen Guiliang countered, "If American websites can't do it, why can't Chinese websites? Many of my features and models are things Facebook doesn't have. If my company were based in the US, Facebook couldn't compete with me. Besides, e-commerce websites in both China and the US are already using this technology. And Renren and HaiNei will be the first and second SNS websites in the world to use this technology!"

Chen Guiliang's spoken English is so-so; he occasionally forgets words when speaking and needs to ask the lawyer next to him for help.

The questioner said, "Mr. Chen, please don't get agitated. I'm just making a reasonable inquiry. This advertising model is unprecedented on similar websites in the United States. Now, please answer the third question..."

After a lot of trouble, the phone inquiry finally ended.

The legal team transcribed the phone recording into a written document, which was then confirmed and signed by Chen Guiliang.

Chen Guiliang walked to the smoking room alone, and Xie Yang followed him in.

"Were you being given a hard time?" Xie Yang asked.

Chen Guiliang said, "It's not exactly being difficult, but some of the questions are just outrageous. Xiaonei.com operates in China, but when it went public in the US, it had to comply with US child laws. Damn it, the US is the only country in the world that hasn't signed the UN Convention on the Rights of the Child, and some states even allow child marriage. How dare they question my failure to protect children's privacy?"

"Does the United States allow child marriage?" Xie Saobang's focus is always different.

Chen Guiliang said, "Yeah, what's so strange about it?"

Xie Yang muttered, "Awesome!"

Chen Guiliang said, "What angers me the most is that I clearly stated this in the registration instructions. Just because similar websites in the United States do not use the same technology, the Americans suspect that I lied in the registration instructions!"

"This kind of thing won't happen again once the country becomes strong." Xie Yang was also somewhat displeased upon hearing this.

Chen Guiliang thought to himself: When the country becomes strong, but before it has completely surpassed the United States, there will be even more of these messy and unreasonable difficulties.

Chen Guiliang said, "Go and arrange for an in-app message to be sent to users under the age of 13. Say that users under the age of 13 must submit proof that their guardians allow them to access the internet. Otherwise, their accounts will be banned."

"Huh?" Xie Yang was dumbfounded.

Chen Guiliang said, "We have to follow the damn American laws, otherwise they won't let us go public."

Xie Yang said, "Isn't this nonsense?"

Chen Guiliang said, "There's always room for flexibility. When you send an internal message to users under 13, you can ask them if their age was registered incorrectly. If it is, correct the registration information as soon as possible. If it is correct, then users under 13 will need to provide proof of guardianship."

Xie Yang was both amused and exasperated.

After being warned like that, anyone with a modicum of common sense would just change their age. Who the hell would go and ask their parents for a certificate?
Furthermore, Chen Guiliang's actions did not constitute illegal inducement, as it is entirely possible that the user entered their age incorrectly. The reminder was given to avoid wrongly banning the account.

(End of this chapter)