Banking & Finance

A matter of influence

KOL incubator Ruhnn hit by American lawsuit over its Nasdaq IPO

Zhang Dayi-w

Zhang Dayi: Ruhnn’s top KOL

With 3.8 million people following her on weibo, Zhang Yuhan promised a sprinkling of sales magic for potential sponsors. So a Shenzhen-based entrepreneur paid Zhang and her agency, Hive Media, Rmb47,500 ($6,723) for a promotional vlog on his wearables brand Erbit.

Zhang’s mojo seemed to work. Her endorsement garnered over 3.5 million views and a thousand comments. But all of this activity did not translate into a single sale. Erbit fumed that Zhang’s popularity wasn’t real and her audience numbers had to be fraudulent. Sina Weibo stepped in and suspended her account but the story took another turn when netizens discovered that the patent Erbit claimed for its products – a device said to provide relief from menstrual cramps – didn’t actually exist. Netizens scoffed at both parties, framing the case as one of “swindler versus swindler”.

The rise of influencers or so-called key opinion leaders (KOLs) in China has its roots in widespread distrust in the quality of products sold via the country’s e-commerce platforms. The KOLs have stepped into the breach by trialling the products on their streaming channels and endorsing them. The best of the promoters have tens of millions of followers who tune in to their infomercial-style broadcasts.

Ironically, the business model of promoting top KOLs – that of the talent agencies whose raison d’etre is transforming ordinary folk into online stars – is struggling with a deepening crisis of trust itself. Hangzhou-based Ruhnn Holdings, which styles itself as the country’s largest internet KOL facilitator by revenue is mired in class action suits from at least 10 law firms in the US, for instance.

Comparing Ruhnn’s IPO prospectus and the first of its results announcements since its market debut in April (see WiC448), the lawyers have faulted it for not revealing at the time of its IPO that the number of online stores for its stars had already dropped from 91 last year to 56 as of March. The full-service KOLs on its books have also dropped from 25 to 14. The variance implies that Ruhnn’s biggest source of income had dived 46% in the run-up to its IPO. That led to charges that Ruhnn’s prospectus was “materially false,” “misleading,” and “lacked a reasonable basis at all relevant times”.

Appointing Jinbo Wang as its new chief financial officer, the Alibaba-backed company has dismissed the allegations and tried to position itself as the target of sharp-suited lawyers from the US. “[They] bend facts under the banner of ‘investigation’ with the aim of obtaining settlement funds from listed companies,” Ruhnn told National Business Daily. “It’s a way to make money, and there are many small practices specialised in such business in the US.”

The case against Ruhnn comes at a time when US lawmakers have been pushing to restrict Chinese listings on American bourses on the grounds of fraudulent practices by some Chinese firms (see WiC470). Still in the process of negotiating a much-awaited trade deal with China, the US Treasury has emphasised that a blanket ban is not being considered at the moment. But a report by Reuters in September suggested that Nasdaq has already tightened some of its IPO rules for Chinese companies. Aside from raising the average trading volumes required of new stocks, the tech-heavy exchange has called for at least half of a company’s shareholders to invest a minimum of $2,500 each in the IPO and indicated that extra scrutiny will be applied if a company fails to demonstrate a strong ‘nexus’ to the American capital markets (such as being unable to demonstrate business operations, shareholders, management or board members with clear connections to the US).

Of the 166 new listings in the US as of September, 21 were mainland Chinese enterprises. They raised a total of $2.9 billion, down 61% from a year earlier, the accounting firm Deloitte estimated.

Nasdaq says the updates to the listing rules weren’t a result of political pressure. But they took into consideration the problem that many of the smaller Chinese companies on the exchange traded very thinly or saw their stock prices slump markedly after their IPOs.

In the case of Ruhnn, its market valuation has dropped nearly 37% since going public, despite the three year-old firm reporting that net losses had narrowed 40% on the year to Rmb26.7 million in August.

Investors have evidently cooled on Ruhnn’s unusual business model and the lawsuits could prove a further drag on the share price.

Perhaps it should contract one of its KOL clients to do some promotion on its behalf…

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