Sina Weibo, China’s popular Twitter-like microblogging service, has filed for an initial public offering with the Securities and Exchange Commission, opting to go public in the U.S. rather than Hong Kong.  As the largest asset of Chinese Web-giant Sina, Weibo has grown impressively since its creation in 2009, boasting 130 million monthly active users and generating $188 million in revenue in 2013.  Although valued at $7 billion, Weibo seeks to raise only $500 million through its NASDAQ IPO, as parent Sina will remain the majority shareholder, and minority shareholder Alibaba (China’s largest online marketplace) will retain much of its 19% stake.

With over 600 million internet users, China has attracted the attention of U.S. investors eager to capitalize on the seemingly limitless tech market.  Weibo, however, is also emblematic of the unique risks posed by investing in Chinese tech, namely government censorship and potentially limited legal recourse for securities violations.

The company candidly admitted in its S.E.C. filings that interference from Beijing and limited investor protection diminish its value, and U.S. investors should carefully consider the risks before rushing to join the Chinese tech IPO bandwagon.  Like Twitter in the U.S., Weibo is popular among a wide array of Chinese celebrities, influential commentators, and average citizens.  The Chinese government, however, has shown discomfort with the mass communication effects of social media; in 2012, Beijing forced the company to briefly disable comments on user posts when rumors of a coup d’etat began trending.  The risk is two-fold: failure to comply with future government demands could risk a forced shutdown of Weibo, but continued self-censoring could cause dissatisfied Chinese users to abandon the service.

Beyond the financial risks, U.S. investors may face difficulties in obtaining judgments for any U.S. securities violations.  While its officers are located in China, Sina Weibo is legally based in the Cayman Islands, notorious as a laxly regulated offshore tax shelter.  While Weibo will be subject to U.S. securities regulations and investors could pursue action in U.S. federal court against it, its IPO filing admits that the Cayman Islands or China may refuse to enforce any judgment obtained against the assets of the company or its officers.

Of course, whether such risks will materialize remains to be seen.  But as Weibo is one of many Chinese tech companies eyeing a U.S. listing, investors should be careful before diving into the tremendous opportunities of the Chinese tech market.

Marshall Cox

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