The Artificial Intelligence software designer SenseTime Group is refiling for its Hong Kong initial public offering. But this time, after being slapped with sanctions, U.S. investors will be barred from buying the shares.
The exclusion of U.S. investors is a sign of things to come if the U.S. government makes it hard or illegal for U.S. investors to buy shares in Chinese companies. On the Chinese side, regulators are eyeing new rules that would bar tech companies from selling shares abroad.
SenseTime filed a supplemental prospectus today in Hong Kong, marking the start of the offer, which runs through Thursday at 12 p.m. The shares are due to start trading on December 30 under the ticker HK:0020.
The prospectus is not for distribution in the United States, we're told - I'd be interested to know if you can open the link. The securities are not registered under the U.S. Securities Act, and "may not be offered or sold, pledge or transferred within the United States or to, or for the account or benefit of, any U.S. persons," the prospectus states, with some questionable grammar and punctuation.
The move is necessary after the U.S. government added SenseTime to its list of companies that it adjudges part of the Chinese Military-Industrial Complex. That caused SenseTime to pull the plug last Monday on its first attempt to sell US$767 million in shares, as I explained on December 13.
No U.S. person or entity is allowed to buy or own securities in such companies 60 days after its inclusion on the list. Investors who already own such stock or other securities have one year after the designation to make the necessary transactions to dispose of the holdings.
SenseTime is selling 1.5 billion shares, yielding up to HK$5.985 billion (US$767.4 million). One change in the refiling is that its cornerstone investors, institutional investors that guarantee to buy a chunk of shares before the offering, are taking up a larger share of the offering. They will buy shares equivalent to US$511.6 million. That's 66.7% of the offering, up about 10 percentage points from the previous plans.
The cornerstone investors include several funds and companies that are ultimately state-owned enterprises under the control of the central government in China, or local Chinese governments.
The offer price will be set on Thursday, December 23, at a range up to HK$3.99 per share. Investors applying to get stock must on application pay the maximum price plus brokerage and transaction costs, subject to a refund if the offer price is less.
It's notable that no U.S. investment banks were involved in the offering, even before the Treasury Department action. The IPO is being led by the Chinese investment bank CICC and the brokerage Haitong, as well as the London/Hong Kong-based bank HSBC (HSBC) .
Two Hong Kong brokerages, BOCOM International and the Hong Kong subsidiary of Guotai Junan Securities, one of China's biggest investment banks, pulled out of the underwriting on the refiled offering. But Guotai Junan remains one of the cornerstone investors.
The New York City-based law firm Hughes Hubbard & Reed, however, did sign off as "special United States regulator counsel" to the company, noting that U.S. securities companies are allowed to support clearing and execution on trades in SenseTime, as long as the ultimate buyers aren't American.
There's some further legalese. Technically, the company going public is a Cayman Islands entity, SenseTime Group Inc., that owns the Hong Kong-based company SenseTime Group Ltd. Since it was the "Ltd." subsidiary and not the "Inc." parent that was put on the list, and the sanctions don't flow "upstream" in a corporate hierarchy, it should actually still be legal for U.S. people and entities to do whatever they want with the shares of the Caymans company.
That's what the law firm says. Somehow, I don't think that's the spirit of the Treasury Department decision... the original creation of this list came from a November 12, 2020, executive order by former president Donald Trump, which was criticized for being vague, in particular on the issue of affiliates with similar names. President Joe Biden issued another executive order on June 3 that essentially rewrote the rules.
The U.S. Treasury Department made its decision over SenseTime on International Human Rights Day, saying Hong Kong-based SenseTime's Chinese operating subsidiary "has developed facial recognition programs that can determine a target's ethnicity, with a particular focus on identifying ethnic Uyghurs." The company has bragged about that capability on patent applications, the Treasury notes, highlighting how its AI surveillance software can identify Uighurs (there are different versions of the spelling) even when they're wearing beards, sunglasses and masks.
China has embarked on a campaign of ethnic genocide in its westernmost Xinjiang province, throwing one million or more minorities into "reeducation" camps, effectively arrested and imprisoned for an unlimited amount of time. They must learn Mandarin Chinese, renounce their culture and religion, and demonstrate sufficiently "patriotic" behavior before being released. Even then, they may be pressed by local officials into taking jobs that amount to forced labor, sometimes to pay off loans for new homes when their existing house was demolished.
SenseTime protests its inclusion on that list, which it says is made based on a "fundamental misperception" of the company. The company says it is "committed to promoting sustainable, responsible and ethical use of AI." It says its tech is developed by scientists and practitioners "with an aim to use technology to improve people's lives."