The SoFi Battle That Won't Go Away
Plus, hard lessons in regulating crypto.
Number of the Week: 12% (explanation below)
The SoFi Battle That Won’t Go Away
A long-simmering conflict over the ownership of fintech superstar SoFi got a fresh boost of energy this week when US Representative Brad Sherman (D-CA) sent a letter to Securities and Exchange Committee (SEC) chairman Gary Gensler, calling SoFi’s recent entry into the stock market “alarming” and “troubling.” Sherman, a California Democrat who ranks high on the House Financial Services Committee and positions himself as a kind of fintech expert, appeared to rely on a still-pending 2018 case in the New York court system, which alleges that onetime SoFi board member Joseph Chen massively defrauded investors in his once-powerful Chinese social media company Renren, which took a large ownership stake in SoFi soon after the firm’s 2011 launch.
The rise and fall of Renren is a fascinating, somewhat sketchy tale. When the Chinese government began blocking Facebook access in 2009, Renren positioned itself as the “Chinese Facebook” and by the end of 2010 claimed 100 million registered users (although there is ample reason to believe that those numbers were inflated). Renren’s 2011 IPO on the New York Stock Exchange was robustly successful, raising nearly $750 million and enjoying a 29% bounce on its first day of trading, creating a market capitalization of $8 billion. This was an especially big payday for SoftBank, which had invested $100 million in Renren in 2008, and has always been Renren’s largest shareholder.
As competitors likes TenCent’s WeChat began to grow, Renren faded, and the company began bleeding losses. A 2014 Bloomberg story carried the devastating headline “The Facebook of China Suddenly Has a Myspace Feel To It.” To salvage the company, CEO Chen and his board turned Renren into a kind of venture capital firm, using the IPO cash to invest in outside companies. One of its earliest investments was a 2012 stake in SoFi; eventually it acquired nearly 15% of the company. Chen had already personally invested $4 million in SoFi in 2011; his LinkedIn profile indicates that he still sits on SoFi’s board of directors, although SoFi’s Web site does not currently list him as a director. (On Monday August 9, SoFi confirmed to FIN that Chen is no longer on the board.)
In 2018, after failed attempts to take Renren private or buy out shareholders, nearly all of Renren’s investment portfolio was spun off into a company called Oak Pacific Investment (OPI), controlled by Chen and his associates. A group of Renren shareholders revolted, charging that the assets were dramatically undervalued. The SoFi shares, for example, were ostensibly worth more than half a billion dollars, but were sold for about half that amount.
That’s where the lawsuit came in; in July 2018, a group of Renren investors sued Chen and his associate David Chao in New York State Supreme Court. The suit has thus far withstood attempts to dismiss it on jurisdictional grounds.
In March of this year, as SoFi was preparing to go public, it named as a newly added defendant to an amended version of the suit. SoFi states in its prospectus: “The Company intends to vigorously defend against the action and believes that any claims against it are meritless. We cannot reasonably estimate an amount of loss or range of possible loss associated with this matter.”
In May of this year, a New York court ordered $560 million in assets controlled by Chen and OPI to be frozen, just ahead of SoFi’s going public via SPAC through one of the vehicles of SPAC master Chamath Palihapitiya. (Disclosure: for research purposes, FIN purchased prior to the June 1 SPAC acquisition—and still holds—a small number of SoFi shares.) A New York judge appeared to endorse the charge at the lawsuit’s core. He asserted that the fact “that the SoFi shares were sold so soon after the spin-off to OPI and for the defendants’ benefit” rather than for the benefit of all Renren stockholders suggested “that these assets were spun off without legitimate corporate purpose.”
In Sherman’s SEC letter this week, he links Chen’s role between Renren and SoFi: “Given Chen’s troubling track record as the steward of a public company, his involvement in a SPAC transaction whereby SoFi has become publicly traded is genuinely concerning.” It’s not clear what, if any, recent event promoted Sherman to write to the SEC; Sherman’s office did not respond to a FIN interview request.
In the meantime, Renren as a company, stripped of its investments in SoFi and other startups, has limped forward, relying for a time on Kaixin, a used car dealership in China, as its primary source of revenue. It sold its interest in that company at the end of 2020; oddly, the obscure, midsized company was the most actively traded and biggest gaining stock on a major US exchange on Friday.
Sherman’s letter raises tough and legitimate questions for the SEC and for SoFi’s leadership:
Given the public allegations regarding Mr. Chen and his role as a SoFi insider, what plans, if any, does the SEC have to review the SoFi SPAC transaction?
Given that the process by which SoFi went public was a SPAC transaction, does the SEC have the tools it requires to pursue its investor protection mandate in a situation like this?
Will Sherman’s letter force Gensler to act? Responding to a FIN inquiry, a SEC spokesperson declined to comment on Sherman’s letter. Prior to Gensler’s arrival, the SEC hardly seemed to give the Renren-SoFi connection front-burner status. Arguably, Sherman has teed up an issue that would simultaneously allow Gensler to win favor with important Congressional allies, and to make a firm statement about the SPAC boom which, while down from its frenzied highs, will nonetheless largely define 2021 for investors. At the same time, it’s not hard to imagine Gensler sitting on his hands until the New York court case reaches some kind of resolution.
The Crypto Crackdown That Wasn’t
There has been a lot of discussion lately about the likelihood of the US government cracking down on cryptocurrency, based in part on the boomeranging infrastructure bill and in part by Gensler’s speech to the Aspen Security Forum.
At the same time, recent stories out of Nigeria illustrate just how tricky it can be to control cryptocurrency. In February, Nigeria’s central bank ordered all banks to close accounts that transacted with cryptocurrencies. (A month later, the central bank seemed to walk its position back a bit, saying it only intended to restrict crypto activity in the banking sector, but that’s a hard distinction to parse.)
At any rate, there are lots of reasons to conclude that Nigerian crypto activity has only increased since then. The blockchain research firm Chainalysis reported that in May, Nigeria received some $2.4 billion in crypto, compared to $684 million in December 2020. More recently, the crypto platform Paxful has said that Nigeria is now the #2 market for crypto trading, behind the United States. The growth is attributed to high inflation of the Nigerian currency, as well as a dramatic increase in peer-to-peer transactions. It’s one more reason why the US regulatory regime needs to be well designed, and not subject to opaque, rushed legislative maneuvers.
FINvestments
🦈Number of the Week: This week, Square made its largest-ever acquisition, buying the Australian Buy Now, Pay Later firm Afterpay for $29 billion in an all-stock transaction, more than a 30 percent premium over Afterpay’s last closing price, and a whopping 42x its FY21 revenues. In January, research by Arizent (the parent company of American Banker and PaymentsSource) found that Afterpay controlled 12% of the US BNPL market, putting it in third place behind PayPal (45%) and Affirm (13%). Square was not a significant BNPL player, which is why the acquisition makes strategic sense. By January 2022, the US BNPL market will of course be much larger, and FIN expects the Affirm market-share number to go higher. How much higher would Afterpay/Square’s number have to get to justify that hefty price tag?
🦈In the very first edition of FIN, we noted that “another factor in fintech’s urgency is that it is a truly global force, with major players in multiple regions, which hasn’t always been true in earlier tech booms.” Fintech’s global power centers really shone through this week with the news that a $45 million Series B round in India’s neobank Jupiter was led by Brazil’s Nubank which, as we’ve noted in the past, is the largest digital-first bank in the world.