Renren.com’s Pre-IPO Problems May Not Move China Investors To Run Run

In China all media is social, so Chinese Internet social media and social networking website Renren.com’s initial public offering planned in a few hours should be smooth sailing. However, the departure of a company director over the weekend and recent inconsistencies in its statistics have caused concern for investors.

Derek Palaschuk, chief financial officer of Longtop Financial Technologies Limited, was also the head of Renren Inc.’s audit committee until a few days ago. Palaschuk reportedly quit Renren’s board after a report by Citron Research questioned Longtop’s accounting and operations, causing Longtop to lose more than 33% of its value at certain points last week.

Palaschuk reportedly departed Renren so that the confusion caused by Longtop’s problems would not influence Renren’s IPO, which is expected to raise almost USD700 million.

Renren.com also took flak in recent days for re-submitting its prospectus with changes to the amount of users the social media website actually accrues. Its original prospectus issued in the middle of April stated the company had a tiny 31 million active monthly users, showing that its user number rose by 32% in the first quarter of 2011.

However, the company days later reissued the report showing the company had merely added five million users in the first quarter, and therefore it grew at only a 19% rate. The company provided no reason within its prospectus for the downsized alteration.

Renren, whose founder Joseph Chen is expected to retain about 22.8% of the firm after the IPO, is headquartered in the Cayman Islands. After the IPO, Chen will retain about 55% voting rights in the company.

That Cayman company operates through four China-based technology companies, at least two of which are 99% owned by Joseph Chen’s wife, Yang Jing. It is these four companies that are ultimately responsible for the operations and revenue-generation of the company and from which income will be derived for shareholders of the Renren.com stock in the United States.

According to Chinese laws, foreign businesses can not run or control Internet businesses that dabble in some of the online content and online advertising services that Renren.com runs. Therefore, according to the Renren.com prospectus, “contractual arrangements” connect the Cayman company selling stock to shareholders and the actual operations and intellectual property operating in China. While these types of contractual connections are common among companies in China, they do provide a certain level of risk because these ties can possibly be severed in the future.

While many of these issues might sideline an IPO for an Internet company based elsewhere in the world, the appetite for Chinese technology IPOs appears to numb bankers and investors to the hazards, opaqueness, and inconsistencies in their understanding of what truly can make a good company in China or elsewhere; and so these problems will most likely only be small bumps soon forgotten in the company’s history.