Billion-Dollar Chinese P2P Lender Collapses 2 Weeks After Filing for IPO in New York

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A large Chinese peer-to-peer (P2P) lender collapsed just a couple of weeks after seeking final approval to launch an initial public offering (IPO) at the U.S. Nasdaq stock exchange.

Tairan, which operates under Xiaotai International Investment, folded after its founder, Pan Baofeng, surrendered himself to police in Hangzhou, Zhejiang Province on Nov. 1, saying his company was involved in illegal fundraising.

The incident soon made headlines, because only two weeks prior, Tairan had announced that it was working towards an IPO on the Nasdaq stock market in New York.

P2P lending platforms in China attract investors who are looking for high returns from cash-strapped individuals or small businesses, and lenders are exposed to a portfolio of unsecured loans with repayments typically made monthly.

Hangzhou authorities issued a statement on Nov. 3, notifying the public that police have detained 13 Tairan employees, including the owner, Pan, as well as top executives, and accountants. The company’s 27 bank accounts were frozen, and two vehicles were confiscated for the time being. Police have also collected the company’s back-end data and accounting books.

According to the company’s website, Tairan started its online lending business in September 2014. By Nov. 1 of this year, it had conducted 4.05 million transactions, with the total value of loans reaching 53.98 billion yuan ($7.71 billion) and involving 3.14 million users.

Among the registered users, more than 19,900 were currently active lenders. When a P2P firm in China is going out of business, its lenders usually recover very little or none of their losses. In the case of Tairan, the current balance of 3.72 billion yuan ($530 million) worth of loans, and current value of unpaid interest, which is 197 million yuan ($28.15 million), may never be reclaimed for the lenders.

Nasdaq IPO Submission

Tairan has been trying to secure an IPO with the U.S. Securities and Exchange Commission in the past year.

According to Chinese news portal Sina News, Tairan submitted an application to the U.S. stock exchange in November last year, planning to raise up to $20 million, but was rejected.

In January and April of this year, Tairan updated its prospectus twice. According to the prospectus, Tairan’s gross income in 2018 was $43.43 million, down 32.42 percent year-on-year, while its net profit was $7.31 million, down 35.46 percent year-on-year.

The big drop in revenue and profit is an indication of the increase of bad debts, which climbed from 1.74 percent in 2016, to 3.17 percent in 2017, and 6.47 percent in 2018. However, Tairan defended its bad debt ratio, saying it was an industry average.

In June, after a series of failures, Tairan attempted to go public through a reverse merger by acquiring the Nasdaq-listed company iFresh, a Chinese owned grocery chain store with a market value of $20 million, even though iFresh was already operating at a huge loss.

On Oct. 15, Tairan announced that the merger had been approved by the U.S. Securities and Exchange Commission, and it was in the process of addressing Nasdaq’s inquiries as part of the final step toward securing an IPO in the United States.

Just when many Chinese investors were looking forward to Tairan becoming another Chinese company going public in the United States, local police announced the bad news. For U.S. investors, it’s a stark reminder that some Chinese companies wanting to launch IPOs in the United States may have provided fraudulent accounting, and the IPO may be intended to raise money to cover business losses.

The first Chinese P2P platform began operating in 2011. Soon, such financial services took on popularity. At its peak in 2015, there were some 3,500 such platforms in China.

China’s P2P industry has experienced a wave of defaults since June 2018. P2P platforms began shutting down one after the other as platform operators were revealed to have scammed investors. The Chinese authorities’ lack of regulation and oversight had led to rampant fraud.

Millions of investors have lost their life savings through fraudulent or failed lending platforms. Many have sought to appeal their cases to the central government, but have been repeatedly silenced.

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