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Pictured is a night view of the City of London.

As a popular technology retail unicorn, SHEIN's listing plans have attracted much attention.

Just last week, news broke that SHEIN is planning to sell shares directly to the British public, including retail investors and professional investment institutions, according to the Global Times, citing British media reports. This means that SHEIN may use DPO instead of IPO to complete its listing in an unconventional way.

SHEIN's listing plan has long been no secret, but the twists and turns in the process were too unexpected: from the United States to the United Kingdom, from IPO to DPO, the urgency and unspeakable hidden reasons are evident.

What is DPO, what information does it contain, and what is SHEIN's consideration? These propositions will be the focus of this report.

01

All roads lead to Rome

Currently, under the framework of the SEC, there are far more ways to publicly issue shares than ordinary investors know. In terms of mainstream methods, there are at least six: the most common IPO, as well as American Depositary Receipts (ADR), private equity QIB listing, reverse merger listing (RTO), direct listing (DPO), and the special purpose acquisition company (SPAC) that has been very popular in the past two years.

Everyone is familiar with ADR. According to the relevant securities laws of the United States, companies listed in the United States must be registered in the United States. As a result, a business was born in the United States commercial banks to assist in the trading of foreign securities in the United States by issuing a transferable certificate, which usually represents publicly tradable stocks and bonds of non-US companies.

Most of the early Chinese Internet companies that went public in the United States adopted the ADR form. China Mobile, Sinopec, Alibaba, Baidu, New Oriental and other Chinese Internet companies all adopted this method.

Private equity QIBs were born out of Rule 144A, which was promulgated by the U.S. Securities and Exchange Commission in 1990. It allows certain qualified securities to be sold to qualified institutional investors (QIBs) without having to fulfill the obligation to disclose securities under the Securities Act. The original intention was to attract more companies to issue securities in the U.S. capital market, and it was considered the most efficient and fastest financing method besides listing. However, in fact, most of the issuances through 144A are bonds.

Reverse merger and listing (RTO) is also known as backdoor listing, where a non-listed company buys a listed company and injects assets into the listed company through reorganization, merger or share exchange, thereby achieving a de facto listing.

The characteristics of a special purpose acquisition company (SPAC) are that it is first issued and listed, and then acquires the future main business through mergers and acquisitions. It is somewhat similar to RTO, but the difference is that it first creates a shell company for listing. As a start-up company, it first raises funds through IPO, and then acquires a target company with operating business within the liquidation time limit. Because SPAC itself is a shell company, there is no complicated debt history problem, allowing the target company to go public without going through the lengthy process of traditional IPO.

Figure: Number of SPAC-IPOs in the past two years, source: Kyoto Lawyers

As for the DPO listing form that SHEIN is considering, it means that the issuer of securities does not rely on or go through underwriters or investment banks, but instead releases listing information and transmits issuance documents through non-traditional channels (the Internet or other media), thereby directly issuing the company's shares to the public.

From this we can see that the main purposes of DPO are nothing more than two: one is to avoid the complicated review process, speed up listing and lower the entry threshold; the other is to avoid the complicated intermediary links and reduce the listing burden or possible sunk costs.

All roads lead to Rome. There are so many ways to play an overseas IPO. One has to sigh that capital is really good at playing. Next, we will discuss the advantages and disadvantages of DPO compared to traditional IPO.

02

The History and Pros and Cons of DPO

The earliest DPO can be traced back to 1984, when Ben & Jerry's Ice Cream Company needed about $750,000 to run its business, so it placed an ad in a local newspaper to sell its ownership shares at $10.5 per share. Ben & Jerry's had a loyal fan base in Vermont, and raised the required funds in about a few months.

However, it was not until 1995 that the DPO model was officially recognized by the regulatory authorities. The SEC published a public report entitled "Using Electronic Media to Disseminate Information": Information sent on paper can also be sent by email, and they have the same legal effect. Although this report did not specifically formulate clear provisions on DPO, it allowed the electronic dissemination of company prospectuses, thus marking the SEC's legal recognition of DPO.

The DPO model became truly well-known about five years ago. In 2019, Slack, the "American version of DingTalk", was listed on the New York Stock Exchange in the DPO model; Spotify, the world's largest music streaming media and well-known company, also landed on the New York Stock Exchange in the form of DPO; the mysterious AI military-industrial unicorn company Palantir also landed on the capital market in 2020 in the DPO model.

Looking at the common points of the three, the most typical feature is that they eliminate the intermediary process, thereby speeding up the pace of listing. According to the data of Xunshi International, the Nasdaq IPO listing schedule shows that the entire financing process (from preparation to listing) takes about one year.

Figure: Nasdaq listing schedule, source: Fast Reality International

DPO does not need to undergo a large amount of institutional due diligence and audits during the preparation stage, and there are even registration exemptions in some states in the United States. At the same time, roadshows and publicity are simpler, which greatly shortens the listing cycle.

Another advantage of the simple process is low cost, because there is no need to hire a specialized intermediary agency. Some media estimate that DPO can save nearly 80% of process expenses.

But on the other hand, the lack of underwriters means that new shares cannot be issued, and financing cannot be carried out. Spotify and Palantir are both well-funded, and as unicorn companies, they have both raised a lot of funds. Slack, whose star power is slightly dim, held a total of US$792 million in cash and cash equivalents before its listing, with sufficient liquidity.

At the same time, there is no roadshow promotion and investment bank intervention. The company is directly listed after pricing by three independent institutions. Its performance after listing depends on the market's general investors, so the stock price fluctuates greatly. For unknown companies, choosing DPO is likely to lead to being seriously undervalued or seriously overvalued, thereby losing the motivation for development. Whether it is Spotify, Palantir or Slack, they are all household names in the US capital market, so they dare to go public through the DPO model.

So in summary:

The advantages of DPO are:

The listing process is fast and the steps are short, which means that there is less due diligence and review involved by institutional investors.

There is no lock-up period for old shareholders, and they can cash out and trade immediately after listing.

The disadvantages of DPO are:

Without intermediate links such as investment banking underwriting and distribution, the stock price will not have the ability to support the market.

Most do not issue new shares and therefore cannot raise funds

03

What is SHEIN considering?

According to media reports, SHEIN is considering "issuing directly to public investors." The original report also directly stated that it is "still in the early decision-making stage."

But we can still roughly sort out the situation of this technology retail unicorn by "considering" this matter itself:

1) Not short of money

As one of the top five unicorns in the world, there is no need to say much about SHEIN's revenue capacity.

Whether it is Slack, Spotify or Palantir, they all faced operating losses before going public. However, according to media reports, SHEIN's annual operating income in 2023 reached US$32.2 billion, and its profit exceeded US$2 billion. It is obvious that SHEIN is relatively more mature, and its operating profit can cover its expenses.

This is more than the capital cushion of more than 90% of the companies waiting to be listed in the market. Therefore, they are more confident to choose the DPO model.

2) Race against time to build capital exit channels

SHEIN, which is not short of money, continues to run in the global mainstream trading market. The core logic is probably to build a capital exit channel. In terms of the time of establishment, the capital that accompanied SHEIN through its establishment period is about more than 10 years, and the demand pressure for capital exit is self-evident.

Take Spotify as an example. In 2016, Spotify raised about $1 billion from investment banks such as TPG, Dragoneer and Goldman Sachs in the form of convertible bonds. The bond agreement states that if the company fails to go public in time, these bonds can be converted into shares at a high discount. If Spotify fails to go public on time, the equivalent bonds can enjoy a 20% discount, as well as a superimposed discount and an annual interest of 5%.

It is not known whether there are similar time limit clauses in SHEIN's financing history, but everyone would be happy if the capital "task" could be completed as soon as possible, so it is understandable to consider choosing DPO.

3) May face pressure from public opinion supervision

Considering the regulatory pressure Spotify faced at the time, this may also be one of the reasons why Shein prefers DPO.

There is strong public pressure in the Western world regarding so-called "equal rights" and "environmental protection", and this is especially true for the UK, SHEIN's listing destination: the UK's High Speed ​​2 high-speed rail project has been delayed in construction due to a large number of complaints from so-called "environmentalists", and the person in charge finally discovered that the environmentalists' demands might just be for money (you can spend money to build new shelterbelts, but you still have to pay money to environmental protection agencies).

Before its IPO, Spotify had been facing debt defaults, unprofitability, and resistance from small and medium-sized music creators. The BBC even published a special report called "The Death Bell Tolls for Spotify." Spotify's choice of DPO has reduced lobbying costs for background checks and review stages to a certain extent.

SHEIN is currently facing considerable pressure. From environmental protection, equal rights, dumping, to copyright, European protectionism has used almost all available tools to put pressure on SHEIN.

If Shein were to go through the formal listing process, from background checks to roadshows, the lobbying costs it would have to spend would definitely not be low, and it might suffer additional public opinion incidents during due diligence or roadshows at some stage, and it is very likely that it would lose both the wife and the army.

Considering the selection of a DPO may be the most effective way to avoid a lengthy review process.

4) Will not dilute the equity of existing shareholders

Another advantage of DPO is that if new shares are not issued, the equity of existing shareholders will not be diluted.

As mentioned in the previous article, SHEIN is currently profitable. Compared with most technology companies that need financing to develop, its subsequent growth does not rely on financing.

SHEIN has experienced development under three models: China, Singapore and the United States. The goal of investors in mature markets such as Singapore and the United States must be to hope that the company can operate in the long term rather than a one-time cash-out.

If listed in DPO mode, it can not only protect the rights of long-term investors, but also meet the liquidity requirements for capital exit.

There is currently no public information that can clearly explain SHEIN’s current equity structure. Perhaps the consideration of DPO is also a decision made by SHEIN based on the long-term interests of internal shareholders.

04

Problems you may face when choosing a DPO

Everything has its pros and cons, and there is no perfect solution. Assuming that SHEIN finally decides to adopt DPO, it will inevitably face two problems: liquidity and valuation.

1) Liquidity of capital markets

Because DPO has no underwriters, facing the market directly actually tests the company's recognition and market liquidity, otherwise it will inevitably face a reduction in value.

Spotify, Slack and Palantir are all listed on the New York Stock Exchange, and the liquidity of the New York Stock Exchange is self-evident. Even so, the well-known company Spotify still faced considerable liquidity pressure on its first day of listing, with only 5.6% of its shares changing hands and the closing price falling by about 10% from the opening price.

SHEIN chose London as its destination. If it is successfully listed, it will be one of the largest IPO projects in the history of the London Stock Exchange. The current total market value of the London Stock Exchange is about 3.5 billion yuan, which is basically the same as that of the Shenzhen Stock Exchange, but the reported transaction volume is only 1/5 of the Shenzhen Stock Exchange's electronic trading volume (Choice data). Although the London Stock Exchange has certain advantages in fundraising and liquidity compared to other markets, it still has a big gap compared to the New York Stock Exchange.

Figure: Comparison of basic conditions of the three major markets, source: XinGong Research, IFind

Therefore, if SHEIN chooses DPO, the liquidity gap may lead to a reduction in valuation, which is an issue that must be considered.

2) Valuation controversy may be relatively large

Spotify's Chief Financial Officer Barry Mccarthy once wrote in the Financial Times that a big reason for choosing DPO was to avoid IPO underpricing.

The so-called IPO underpricing refers to the initial offering price being significantly lower than the listing price. Too low a price will affect the interests of the issuer and reduce the underwriter's income, while too high a price may lead to insufficient subscription and thus difficulty in issuance. DPO commissions a third-party independent evaluation company to issue an evaluation report and proposes a reference price to the stock exchange for reference by external investors on the day of listing. The rise and fall of stock prices mostly comes from the popularity of the company.

This also means that the pricing power will not fall into the hands of intermediaries and investment banks. However, the disadvantage is that there is no lock-up period and institutional investors to maintain the stable listing of stock prices. Shareholders can sell all their shares at once, causing large fluctuations in stock prices.

SHEIN's valuation has been unstable since last year. Last year, SHEIN's financing valuation was approximately US$66 billion, which was nearly 1/3 less than the previous year. Such a large fluctuation is bound to affect market perception. Correspondingly, if DPO is adopted, it will cause greater fluctuations, which is a situation that SHEIN's cornerstone investors are unwilling to face.

3) There is still pressure for censorship

Although DPO has fewer review steps than IPO, it will still face review once it is listed on the exchange, and it cannot completely avoid the review dilemma. In addition, there is a successful case of Chinese stocks listed through DPO on the New York Stock Exchange (China Index Holdings in 2019), and public information has not found a similar precedent on the London Stock Exchange, so it may face unexpected review issues.

Of course, all considerations are currently in the early stages, and it is very likely that SHEIN will not ultimately choose the DPO model.

For SHEIN, it is definitely good to make more attempts. If SHEIN finally chooses the DPO model, borrowing the most popular line of Black Wukong, it feels like "facing destiny directly", giving up some worldly fame and fortune, and leaving the value to the market to judge, so as to let go of the capital pressure and face its own destiny (listing demand).

After all, with the current situation of cross-border e-commerce and Amazon, the North American base, pressing forward step by step, SHEIN has very little time to deal with the troubles in the world.