In what should come as a surprise to no one, group buying site LaShou’s IPO has hit its first major roadblock, in a development I expect will probably kill its troubled offering even as the company tries to downplay the setback. Foreign media are reporting the cash-starved company, China’s largest group buying site, has temporarily suspended its IPO to answer questions from the US securities regulator about its accounting. (English article; Chinese article) I previously flagged this issue last month, when media reported that LaShou had to hire several second-tier investment banks, including Nomura and CICC, to underwrite the IPO after Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS) resigned the case, reportedly due to concerns about LaShou’s accounting for some of its previous acquisitions. (previous post) Market buzz at the time said the new underwriters were encouraged to “expedite” their due diligence to speed up the process, with the heavy implication that company managers didn’t want their books examined too closely. The US Securities and Exchange Commission’s (SEC) latest decision to take a closer look at LaShou’s books no doubt comes in response to some of these early reports, and as US-listed Chinese firms in general come under the microscope for a recent series of accounting scandals that have hit all of their shares. According to the latest reports, LaShou is trying to assure potential investors that this delay is only a temporary setback, and that the IPO, which has already been scaled back to raise $75 million from an initial target of $100 million, will move forward as soon as all of the SEC’s questions are answered. But my guess is that the SEC may discover some “issues” with some of LaShou’s accounting, forcing the company to either reissue amended IPO documents, which would scare off many investors worried about the company’s credibility. Rather than face that kind of negative reaction that would not only cause major embarrassment but also hurt its future IPO chances, the chances are higher than LaShou will quietly withdraw its IPO application, citing poor market sentiment, and try again next year.
Bottom line: LaShou is likely to withdraw its IPO application following a reported closer examination of the company’s books by the US securities regulator.
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