4 Key Issues Impeding Shein IPO in The U.S.

Shein IPO

If the Shein IPO manages to ring the bell on the Nasdaq exchange at a mid-2023 valuation – $66 billion – it will be the most valuable company to go public in the U.S. since Uber in 2019.

In the present day, it is clear that Shein, a large company born with a Chinese background, will not be so smooth in its attempt to go public in the United States.

Shein IPO

Even before Shein secretly filed its application with the U.S. Securities and Exchange Commission (SEC) in November 2023, a number of U.S. Congressmen asked the SEC to investigate Shein’s supply chain and other issues. In February of this year, China hawk Congressman Marco Rubio wrote an open letter to SEC Chairman Gary Gensler, urging the SEC to require Shein to disclose more details about its operations, or else request the SEC to prohibit Shein IPO.

Shein IPO idea was to change listing venues – in February 2024, several media outlets reported that Shein wanted to move to a London listing, with Hong Kong, China, and Singapore also under consideration “because it was felt unlikely that the SEC would approve the IPO.

In today’s business world, it’s hard to find a company like Shein: a fast-fashion retailer that started in China but is poorly known there; a company so big that it was once valued at more than $100 billion, but mysterious enough to be pushed to the forefront almost overnight because of its rapid rise to prominence; a company that derives the vast majority of its revenues from overseas, but whose supply chain is based in Guangzhou, China; and a company that U.S. regulators consider to have Chinese genes, but whose identity has actually become complicated after a series of write-offs of its Chinese companies and relocations of its headquarters. It has Chinese genes, but in fact, after a series of operations such as canceling its Chinese companies and relocating its headquarters, its identity has become complex and ambiguous.

These elements create uncertainty in Shein IPO journey and will objectively lengthen its listing cycle.

Either a blocked or extended IPO could have a cascade of negative effects – according to media reports, Shein, which had a $90 billion offering target when it first secretly filed its form in the U.S., was valued much lower in private placement deals at the end of 2023, having slipped to $45-$55 billion, down from $66 billion at mid-year. The longer it drags on, the more Shein will lose its value. The longer it drags on, the farther Shein will fall from its $90 billion target.

As the Shein IPO looks destined to be a tough one, Createsomes Studio has compiled four key questions about Shein’s IPO process, sorting through the corresponding regulations and the current status of Shein. Since Shein IPO is secret and the prospectus has not yet been made public, these answers may not provide a definitive answer, but they will give you a more complete picture of where this IPO is headed.

What kind of local scrutiny does Shein IPO face when trying to list in the U.S.?

In the context of the current geopolitical challenges, the SEC’s approval of a company’s IPO first requires a determination as to whether a listed company is a ‘Chinese company’ – in July 2021, SEC Chairman Gary Gensler issued a statement on investor protection. In the statement, he said that offshore issuers associated with Chinese operating companies must add specific disclosures before the SEC will approve a registration.

What kind of companies are “Chinese companies” under the U.S. regulatory system?

A November 2020 guidance issued by the SEC’s Division of Corporation Finance refers to China-Based Issuers (CBIs) as companies that are headquartered in China or have a substantial portion of their operations in China.

On a practical level, several attorneys have pointed out that the SEC makes judgments based on the data submitted by the company, including the company’s place of incorporation, principal place of operation, shareholding structure, beneficiaries, business model, financial statements, etc. The location of Shein’s previous headquarters (which was first in Nanjing and then relocated to Guangzhou), the layout of the supply chain in China, and the large number of Chinese management are all factors that could lead to a determination that Shein is a Chinese company. may be recognized as a Chinese company.

And once Shein is recognized as a Chinese issuer, it will have to add more in the “Risks and Disclosure” section of its prospectus – including whether domestic policies support cross-border e-commerce companies like Shein going overseas, and whether Shein’s in-country subsidiaries are compliant with specific domestic laws and regulations.

Shein's offline store window in Tokyo, Japan

“One of the most important criteria for prospectus disclosure is that information that affects investors’ decisions must be disclosed, whether it is risky or factual.” Huang Jingjing, a senior partner at Jintiancheng Law Firm, said that if a company’s share price plummets after listing and the reason is ultimately determined to be inaccurate disclosure – for example, the prospectus discloses that it does not have to go through a domestic filing and does not have any relevant risk tips, but the relevant authorities later explicitly state that the company should have filed but did not, the company would likely constitute a material violation under U.S. securities laws and be subject to a class action lawsuit by U.S. investors.

“In fact, under the registration system, as long as a company meets the listing conditions and has made sufficient disclosure according to the standards and requirements of the regulator’s information disclosure, it can be listed.” Fan Jianhong, a senior partner at Dacheng Law Offices, said, “But nowadays, in addition to the regular listing and disclosure standards, there are some additional factors that may affect listing.” — One of the additional factors is geopolitics.

Republican Senator Marco Rubio, who has proposed legislation to ban the use of TikTok, sent a letter to the SEC on February 15 of this year, demanding that Shein disclose the “serious risks” of its “business operations” in China, including a requirement to disclose and acknowledge that Shein’s business is dependent on a minimum import duty exemption, among other things, or else the SEC should prohibit Shein from going public.

Although the Senate Banking Committee oversees the SEC, Rubio has no personal authority over the agency and does not serve on the committee. Still, he called on Gary Gensler in his letter to demand more disclosure from Shein.

Earlier, a bipartisan group of lawmakers sent a joint letter to the SEC Chairman in May 2023, and in August of the same year, the attorneys general of 16 U.S. states sent a joint letter to the SEC, all requesting a review of Shein’s supply chain, among other issues.

These political pressures are reflected at the regulatory level in ‘more rounds of questions’ and longer listing times – the SEC and the Nasdaq exchange, when reviewing a company’s application to go public, may make multiple rounds of written review comments asking for additional information or clarification of certain things. In turn, the company must respond to all inquiries, which can objectively result in an extended listing process. If the company fails to respond to these inquiries in a timely or adequate manner, the listing process may be suspended or terminated.

A lawyer engaged in IPOs in China, Hong Kong and the United States has experienced a similar situation. He was involved in the listing of a Hong Kong company on the Nasdaq exchange, which took two years from the filing of the prospectus to the successful listing, and one of the reasons why the listing time was well outside the normal range was that the company was questioned by the regulator in many rounds. “The tricky part is that once or twice a month it gives you one or two questions, you respond, and it ignores you. But it doesn’t say it won’t list you.” The lawyer told Createsomes, “Theoretically you can get listed by answering all the questions [from the regulator], but it can keep asking you other questions and keep dragging you down.”

“The general rule is that companies can’t go public because they don’t meet the listing requirements, and that’s the way it is in capital markets all over the world. At this point in time, the points that [the lawmakers] are attacking are not enough for the SEC or the exchanges to determine that Shein IPO can’t go public.” – Ms. Wong

Is Shein a Chinese company?

There is no doubt that for a Chinese company to list outside China, it must file with and be approved by the relevant Chinese regulatory authorities.

But in fact, after a series of operations such as canceling its Chinese companies and relocating its headquarters, Shein’s identity has become blurred, complex and difficult to identify.

Shein started in Nanjing in 2008 by founder Xu Yangtian, focusing mainly on cross-border e-commerce wedding dress business in the early days. Four years later, after acquiring a website with the domain name SHEINside.com, Shein began to focus on the overseas fashion item market, and thus started a crazy and legendary growth path – in ten years, Shein swept the European and American markets as a dark horse, and in 2022 and 2023 consecutively won the Global Shopping App Download Champion, becoming the most popular online shopping app in the world.

However, since 2016, Shein has begun to cancel its Chinese companies in bulk, including not only Nanjing Dewei Information Technology Co., Ltd. which was founded in 2008, but also Nanjing Leader Information Technology Co., Ltd. which used to be the main operating body of the country and has completed several rounds of financing.

In 2019, Roadget Business Pte, a Shein Singapore company, was established and became the operating entity for the Shein website from the end of 2021.

In 2022, media reports claimed that Shein has moved its headquarters to Singapore. At the same time, Shein’s domestic subsidiaries have also undergone a series of equity structure adjustments – Guangzhou Shein International Import & Export Co Ltd, the domestic operating body established in August 2017, was originally a sino-foreign joint venture, and in December 2019, it was changed to a wholly-owned Taiwan, Hong Kong and Macao legal entity, with Hong Kong’s Jotian Business Co Ltd as a shareholder. At the end of 2021, the controlling shareholder of Guangzhou Xiyin once again changed to the current Singaporean company, and the enterprise type also changed from wholly-owned by a Taiwan, Hong Kong and Macau legal person to wholly-owned by a foreign legal person.

In this context, the media speculated that Shein’s above operation is to bypass the domestic record. In the opinion of lawyer Huang Jingjing, this speculation is debatable. She said, from the time point of view, public information shows that Shein has been building and adjusting its overseas structure since the angel round of financing in 2015, which is earlier than the release of the new rules for the record. From a business point of view, Shein’s early targeting of ZARA and other global FMCG brands, the market is laid out in overseas, the rounds of financing investors are basically international investors with the background of the dollar fund, the current structure is more popular with international investors.

However, it is worth noting that since the Trial Measures for the Administration of Offshore Issuance of Securities and Listing of Domestic Enterprises and Supporting Rules (hereinafter referred to as the new filing rules) came into effect on March 31, 2023, the SEC has already brought all indirectly offshore-listed enterprises that were originally outside of the regulatory horizon under the regulatory umbrella through the ‘Definition + Touting’ approach – the This means that even if Shein’s identity is difficult to define, it may still enter the scope of the filing.

Therefore, for large companies like Shein, several lawyers told Createsomes Studio that from a risk-control point of view, they would advise them to communicate with the relevant Chinese authorities in a timely manner.

Shein parties at UK festivals in 2022

Will Shein IPO go smoother by shifting to London, Singapore, and Hong Kong listings?

In fact, Shein had concerns about plans to go public in the United States.

In December 2024, a month after news of a U.S. listing broke, Shein Executive Chairman Donald Don met with London Stock Exchange executives during a visit to London. According to media reports, the discussion focused on the possibility of Shein listing in the UK. But for Shein at the time, the U.S. remained the preferred listing option.

By February of this year, a number of media outlets were reporting that Shein was looking for a new listing, with London, Singapore, and Hong Kong all under consideration. Jeremy Hunt, the UK Chancellor of the Exchequer, met with Donald Trump in February. Insiders told the media that the discussion was “productive”.

London is looking forward to Shein’s IPO – partly because the London Stock Exchange is facing an unprecedented moment of crisis. For one thing, the U.K. has raised just $1 billion through IPOs in the past year, the lowest level in decades. Arm Holdings Plc, the U.K.-based chip designer, also chose not to list on the LSE, instead traveling to the U.S. for an IPO on the Nasdaq.

On the other hand, companies already listed on the LSE are also migrating overseas. Gambling operator Flutter Entertainment and pharmaceutical company Indivior, both plan to move their primary listings to the US, citing higher valuations and more liquid markets there.

If Shein succeeds in its IPO on the LSE, it would likely be the second-largest IPO in the history of the LSE, behind the 2011 IPO of commodities trading and mining group Glencore International.

A spokesman for HMRC said reforms have been put in place to promote the UK as an IPO destination, including making it easier and faster for companies to go public.

“Whether it’s the London Stock Exchange or the Hong Kong Stock Exchange, the focus of the listing audit is actually pretty much the same everywhere, but one difference is the influence of political factors.” A mainland lawyer engaged in both inbound and outbound IPOs for Chinese companies told Mirrorphoto, “If the review in the US doesn’t go well enough and you take it to the London Stock Exchange, maybe the UK won’t necessarily see it that way, but it’s not absolute.”

At this stage, a successful IPO is clearly more important to Shein than a higher valuation and better stock liquidity.

“Listing is a bang-up activity. If you keep getting delayed, it may cause a series of negative impacts, such as the market’s suspicion of you and pressure on your performance, etc.,” she said. Huang Jingjing analyzed that the slower the listing, the easier it is to face all kinds of risks, such as investor repurchase pressure, audit costs, and missing the window period for listing financing.

Shein opens the world's first permanent offline store in Tokyo, Japan in December 2022

Besides going IPO, what other problems does Shein face?

The reality is that going public isn’t Shein’s only problem right now.

Shein Data compliance in the U.S. has become increasingly problematic – on February 28, Biden signed an executive order requiring the U.S. Department of Justice to adopt rules restricting the sale of sensitive personal data about Americans (including genomic data, biometric data, personal health data, geographic location data, and certain categories of personally identifiable information) to six countries, including China, and to entities associated with those countries. data, geolocation data, financial data, and certain categories of personally identifiable information).

Once the proposed legislation under the executive order passes, there will be more restrictions on access to consumer personal information in the U.S. not only for Shein, but also for companies such as Temu. “Cross-border e-commerce is highly dependent on personal information. Therefore, if all of the proposed legislation under the Executive Order is passed, it will have a greater impact on the development of the company’s business in the U.S. and the sustainability of its performance.” – Ms. Wong

As a matter of fact, Shein’s data issues have also been on the radar for a long time. In April last year, the US-China Economic and Security Review Commission (USCC) released an investigative report that found Shein and Temu had data security, procurement violations, and exploited trade loopholes. The report named Shein as utilizing user data and search history, analyzing emerging fashion preferences through AI algorithms, but lacking effective user data protection measures.

Meanwhile, in France, Shein is about to face higher fines and advertising restrictions.

On March 14, the French National Assembly unanimously passed a fast fashion bill Bill No. 2129, which plans to impose an initial tax of €5 per fast fashion product from 2025 (the average price of a Shein garment is €7), with fines increasing to a maximum of €10 or 50 percent of the selling price by 2030. The bill also proposes a ban on advertising by fast fashion companies and products.

While many brands fall into the fast fashion category (the proposal redefines a fast fashion company as one that launches more than 1,000 new products per day), Shein is specifically named in the proposal – “With an average of more than 7,200 new clothes and more than 470,000 different products launched every day, 900 times more than the traditional French brands, the French textile industry has been severely hit by fast fashion companies like Shein”. The French textile industry has been hit hard by fast fashion companies like Shein”.

The bill must still be approved by the French Senate before it can enter into force.

SHEIN HQ signage, Singapore, 2023.

Additionally, funding for continued growth is something Shein will have to contend with – even though Shein is healthy in terms of financials, having been profitable for four years in a row and continuing to grow revenues. In a management report presented to investors, Shein said it is aiming to double its annual revenues again by 2025, to $58.5 billion.

But Shein’s growth is slowing and profits are declining – net profit of $700 million in 2022 is down about 36% year-over-year.

One reason, perhaps, is that Shein is expanding its global supply chain. in 2022, Shein began looking for suppliers to work with in Turkey, with plans to have 20 percent of Shein’s EU sales come from Turkish factories by the end of 2023. in April 2023, Shein announced plans to invest R$750 million ($148 million) in new technology training for Brazilian manufacturers, with a view to partnering with 2,000 Brazilian textile mills over the next five years. In April 2023, Shein announced plans to invest R$750 million (US$148 million) to train Brazilian manufacturers in new technologies and work with 2,000 Brazilian textile factories over the next five years. Currently, Shein has agreements with 220 mills in 12 Brazilian states.

By establishing warehouses overseas and partnering with factories to localize production and operations, Shein has been able to reduce distribution costs, speed up delivery times, and gain better access to emerging markets like Brazil, where tax compliance is complex and logistics costs are high. But the up-front costs of localizing operations can also affect Shein’s bottom line.

But Shein wasn’t satisfied. In October 2023, Shein appointed Marcelo Claure, former COO of SoftBank, as global executive vice president in charge of the company’s global growth program. Marcelo said it would continue to expand its manufacturing operations outside of China “to be closer to consumers.” This also means that Shein will need to invest more money in overseas factories and warehouses in the future.

In addition, Shein’s acquisition spending has grown. Over the past year, Shein has acquired two businesses in a row, first acquiring a one-third stake in Sparc Group in August, and then going on to acquire Missguided, a fast-fashion brand owned by British fashion retail group Starlion, and all of its intellectual property rights in October. The amounts of these two acquisitions have not been disclosed.

What’s more, in many regions, Shein also has to deal with competition from strong rivals like Temu and TikTok.

Temu, backed by Pinduoduo, is like a catfish, changing the landscape of cross-border e-commerce and accelerating Shein’s growth. In contrast, Shein’s capital thickness is relatively weak, and it needs more money to cope with competition from Temu in advertising and marketing, copyright lawsuits, and merchant capture, as well as to better fulfill its vision of globalization – against this background, going public as soon as possible seems necessary and urgent.

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