Daojia Ltd [JIA] Filings

As filed with the Securities and Exchange Commission on July 2, 2021

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Daojia Limited

(Exact name of Registrant as specified in its charter)

 

 

Not Applicable

(Translation of Registrant’s name into English)

 

 

 

Cayman Islands		7370		Not Applicable
(State or Other Jurisdiction of Incorporation or Organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

8/F, Building 5, Beijing Cultural Creative Building

No. 30 Beiyuan Road

Chaoyang District, Beijing, 100012

People’s Republic of China

+86 10 8347 6824

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Cogency Global Inc. 122 East 42nd Street, 18th Floor New York, NY 10168 (800) 221-0102

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Will H. Cai, Esq. Michael X. Yu, Esq. Lisa Yuan, Esq. Cooley LLP c/o Suites 3501-3505, 35/F Two Exchange Square 8 Connaught Place, Central Hong Kong +852 3758-1200		Jonathan B. Stone, Esq. Vincent Sze, Esq. Skadden, Arps, Slate, Meagher & Flom LLP c/o 42/F, Edinburgh Tower, The Landmark 15 Queen’s Road Central Hong Kong +852 3740-4700

 

 

Approximate date of commencement of proposed sale to the public: as soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

Title of each class of securities to be registered		Proposed maximum aggregate offering price(2)(3)		Amount of registration fee
Ordinary shares, par value US$0.0000025 per share(1)		US$100,000,000		US$10,910

 

(1)

American depositary shares, or ADSs, issuable upon deposit of the ordinary shares registered hereby will be registered pursuant to a separate registration statement on Form F-6 (Registration No. 333-            ). Each American depositary share represents              ordinary shares.

(2)

Includes ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the shares are first bona fide offered to the public, and also includes ordinary shares represented by ADSs that may be purchased by the underwriters pursuant to an over-allotment option. These ordinary shares are not being registered for the purpose of sales outside the United States.

(3)

Estimated solely for the purpose of computing the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the United States Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Preliminary Prospectus dated                 , 2021

American Depositary Shares

 

 

Daojia Limited

Representing              Ordinary Shares

 

 

This is an initial public offering of              American depositary shares, or ADSs, representing ordinary shares of Daojia Limited.

We are offering              ADSs in this offering. Each ADS represents              ordinary shares, par value US$0.0000025 per share. We anticipate the initial public offering price per ADS will be between US$             and US$            .

Prior to this offering, there has been no public market for the ADSs or our ordinary shares. We will apply to list the ADSs on the New York Stock Exchange under the symbol “JIA.”

We are an “emerging growth company” under applicable United States federal securities laws and are eligible for reduced public company reporting requirements.

Investing in the ADSs involves risks. See “Risk Factors” on page 18 to read about factors you should consider before buying the ADSs.

Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved any of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

		Per ADS				Total
Initial public offering price		US$				US$
Underwriting discount and commissions(1)		US$				US$
Proceeds, before expenses, to us		US$				US$

 

(1)	For a description of compensation payable to the underwriters, see “Underwriting.”

The underwriters have a 30-day option to purchase up to an additional              ADSs from us at the initial public offering price less the underwriting discount and commissions.

The underwriters expect to deliver the ADSs against payment in U.S. dollars on                 , 2021.

 

 

 

J.P. Morgan				UBS Investment Bank		CICC

The date of this prospectus is                  , 2021.

To make every home a happier place and to help every service provider work better An emerging ambition even small to start with already has great expectations.

TABLE OF CONTENTS

 

		Page
Prospectus Summary			1
The Offering			11
Summary Consolidated Financial and Operating Data			14
Risk Factors			18
Special Note Regarding Forward-Looking Statements and Industry Data			62
Use of Proceeds			63
Dividend Policy			64
Capitalization			65
Dilution			67
Enforceability of Civil Liabilities			69
Corporate History and Structure			71
Selected Consolidated Financial Data			75
Management’s Discussion and Analysis of Financial Condition and Results of Operations			78
Industry Overview			114
Business			124
Regulation			151
Management			169
Principal Shareholders			177
Related Party Transactions			179
Description of Share Capital			181
Description of American Depositary Shares			196
Shares Eligible for Future Sale			205
Taxation			207
Underwriting			214
Expenses Related to this Offering			228
Legal Matters			229
Experts			230
Where You Can Find Additional Information			231
Index to Consolidated Financial Statements			F-1

 

 

No dealer, salesperson or other person is authorized to give any information or to represent as to anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell, and we are seeking offers to buy, only the ADSs offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or any sale of the ADSs.

Neither we nor the underwriters have done anything that would permit this offering or the possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where other action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any free writing prospectus filed with the U.S. Securities and Exchange Commission, or the SEC, must inform themselves about, and observe any restrictions relating to, the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the United States.

 

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Until                , 2021 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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LETTER FROM OUR FOUNDER

Dear Daojia Investors:

Our Company is built with a simple mission: to make every home a happier place.

In China market, we have over 30 million service providers today caring for hundreds of millions of families. From the supply side, many service providers are female workers from rural areas, who are the breadwinners of their families by helping other families, but don’t get the respect they deserve or job security. From the demand side, those hundreds of millions of families who need home services lack transparency of information of service providers and trust.

We set out our mission to help tens of millions of people find jobs and serve hundreds of millions of families. This is our motto. We print it on the back of our employees’ ID cards to remind them this is the reason why we are relevant and powerful.

So far we have served millions of families, provided over US$3 billion value of job opportunities to service providers, and trained more than one million service providers in the past three years. After seven years of operation, we are now the largest one-stop home services platform in China. We have become the industry leader and a pioneer in standardization and digitalization of home services market in China.

Throughout this journey, we have been continuously evolving to address market pain points, but our belief has never changed.

What is our belief behind our mission?

We believe in the power of time. We selected a vertical which is extremely difficult to build barrier but once you have long term commitment you can make a huge difference. As Warren Buffett once said, “Life is like a snowball. The important thing is finding wet snow and a really long hill. ” Home services market is all about hard work but with significant potential. We believe that the demand for home services in China will continue to expand, and the next 20 years will be the golden age. We believe our business is well poised to capture the industry tailwinds and we are fully committed to investing our time and effort to shape and drive the industry.

We believe in the power of corporate value and culture. We cannot build a business with just some genius ideas by the founder. We must rely on our corporate value and culture, throughout the recruitment and training of service providers and building our platform’s core competitiveness. We have a collaborative and teamwork culture and will not allow anyone to override such culture or sacrifice it for short-term gains.

We believe in the power of kindness. Daojia’s foundation is originated with a purpose to help millions of ordinary individuals improve their lives. Our priority is to help every service provider work better with increased job satisfaction. Our business is built with strong social responsibility and we believe a great business needs to integrate social value, commercial value and entrepreneurship.

What are our next steps to further revolutionize China’s home services industry?

The status quo of current China home services industry is that there are nearly 630,000 home services agencies in China, but most operate as mom-and-pop shops, generally without brand, scale, standard services, digital capability or quality assurance. Most of these mom-and-pop shops lack the ability to verify the authenticity of the service providers’ identities or work experience. Some of these shops cannot even ensure that the service providers are paid on time.

When we founded this business in 2014, we realized that if Daojia were to revolutionize the home services industry, we must be the pioneer to form a technology-enabled infrastructure, enable the digitalization and foster new business models of the industry.

 

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To achieve our goal, our first step is to become the largest home services platform in China to influence the whole industry. We aspire to bring the solution of standardization and digitalization to the industry participants. We are committed to building an open, collaborative platform to empower everyone in the home services industry to prosper.

After nearly seven years of hard work, Daojia has achieved our first goal of becoming an industry leader. We have just set out our journey to reach our second goal.

In the next five years, we will:

(1) expand our geographic coverage and service offerings to bring more accessible, quality home services to people;

(2) provide more career development solutions to service providers and bolster their well-being; and

(3) with accumulated experiences and practices, constantly improve our Swan Collaboration Network to empower individuals and businesses in the industry and transform the entire industry.

From providing home services to consumers, to empowering service providers in the entire industry, we have been continuously evolving and adapting. We intend to leverage our leadership and the infrastructure built so far to empower our partners and industry participants and continue to showcase our capabilities to upgrade the industry standard.

The Future of Daojia?

Becoming a listed company is a key milestone, but it is not the finishing line. We continue to progress towards the next ground-breaking change in our business scale or user experience. After our initial public offering:

(1) We will continue to make long-term investments and do the things that are difficult but right in the long term. We will implement our strategy focused on the supply of service providers and continue to digitalize the industry. We have the will and determination to take on challenges. These are our unchanged principles.

(2) We will continue to focus on the home services market in China. China’s home services market has undergone tremendous changes and made significant progress, but there is still a large gap between status quo and the expectations of our users. Our strategy is to stay focused on the entire value chain of the home services industry.

(3) We will adhere to our founding principle to help every service provider work better. Becoming a listed company means we must bring value to the shareholders, but more importantly we aspire to make bigger impact and bring more social value.

We uphold our entrepreneurial spirit and insist on our core principle of being customer centric and hardworking. What we care about is how we help our consumers and service providers to live better lives. We aspire to treat every task seriously and leave no regrets.

When we founded this company in October 2014, I myself met with a dozen of service providers who were the very first batch to join our training program. They did not have faith in the jobs and even looked a bit dispirited. I encouraged them and said if one day Daojia becomes a listed company, I would invite them to join me to ring the opening bell at New York Stock Exchange. I want to show the world the power of belief and the power of home service provider network in China.

 

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We would like to thank our colleagues, service providers and users for giving us the opportunity to fulfill that promise. The next 20 years will be the golden age of China’s home services industry and we have just begun. I would like to conclude with a phrase I used when I spoke to my first batch of employees:

“An emerging ambition, even small to start with, already has great expectations.”

Thank you.

Xiaohua Chen

Founder and CEO of Daojia

 

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RISK FACTORS

An investment in our ADSs involves significant risks. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Risks Relating to Our Business and Industry

Our limited operating history and the rapid evolution of our business model make it difficult for investors to evaluate our business and prospects.

We have a limited operating history. We commenced our operations in August 2014 when 58.com Inc., or 58.com, one of our indirect shareholders, launched its home services business. We facilitate consumers and service providers to enter into transactions for comprehensive home services, including maternity nurse, nanny and housekeeping services, to satisfy the evolving needs of consumers. In 2017, we started to build the Swan Collaboration Network, or “SCN,” to reshape the traditional home services market with our technology-enabled and data-driven infrastructure. We offer other industry participants, such as home services agencies, access to various SaaS-based solutions on our platform to help them improve transaction process and service quality. In March 2019, we started to offer career empowerment services, such as skill advancement training, skill accreditation and well-being services, to service providers.

Our limited operating history, particularly in some of our services, and the rapid evolution of our business model mean that our historical growth is not necessarily indicative of our future performance. We cannot assure you that we will achieve the expected results or that we will be able to achieve similar results or grow at the same rate as we did in the past. As our business and the industry in which we operate continue to develop, we may adjust our service offerings or modify our business model. Any such adjustment or modification may have a material adverse impact on our business, results of operations and financial condition.

We have a history of cumulative losses and may have further losses as we continue to grow our business.

We have incurred net losses and net operating cash outflows in the past. In 2018, 2019 and 2020 and for the three months ended March 31, 2021, we had net losses of RMB591.2 million, RMB615.6 million, RMB614.7 million (US$93.8 million) and RMB143.9 million (US$22.0 million), respectively, and we had net operating cash outflows of RMB343.5 million, RMB351.7 million, RMB506.4 million (US$77.3 million) and RMB115.1 million (US$17.6 million), respectively. We expect our costs and expenses to increase in future periods as we continue to expand our business and operations. We also expect to incur substantial costs and expenses as a result of being a public company.

We cannot assure you that we will be able to generate net profits or positive operating cash flows in the future. Our ability to achieve profitability depends largely on, among other factors, our ability to expand our consumer base and service provider network, increase orders and transactions on our platform, attract industry participants to join our SCN, achieve economy of scale, expand our scale of operations, implement effective pricing strategies, and increase operational efficiency. If we are unable to generate adequate revenues to offset the associated costs or effectively manage our costs and expenses, we may continue to incur significant losses and operating cash outflows in the future and may not be able to achieve or subsequently maintain profitability.

The growth of our home services business depends on our ability to attract and retain a large community of consumers. Loss of consumers, or failure to attract new consumers, could materially and adversely affect our business.

Our business depends heavily on the number of consumers who search for quality service providers. Our ability to attract and retain consumers depends on a number of factors, including but not limited to:

 

•

the types of home services offered on our platform;

 

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the size of our service provider network;

 

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our ability to maintain market leadership and brand recognition;

 

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the quality of home services provided by service providers;

 

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the efficiency of our matching services;

 

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the quality of our after-sales service; and

 

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the effectiveness of our sales and marketing efforts.

If we fail to attract and retain consumers on our platform, our revenues may not grow and our business as well as operating results could suffer materially.

We have invested in, and will need to continue to invest significant time, efforts and resources in, advertising and market promotion initiatives. We may need to devote greater resources to attracting consumers and strengthening our brand recognition, which may negatively impact our results of operations and financial condition. We cannot guarantee that our marketing efforts will ultimately be successful, as their effectiveness is affected by numerous factors, including, among others, the level of our investments in, and the effectiveness of, our sales and marketing campaigns, our ability to provide consistent and high quality services, consumer satisfaction, as well as supports and value-added services to consumers.

Our growth depends on our ability to maintain and expand our network of service providers. Failure to attract and retain service providers or a decrease in supply of service providers could materially and adversely affect our business.

A substantial portion of our revenues comprise the service fees we charge for facilitating transactions between consumers and service providers through our platform and training fees associated with our career empowerment services. Our business relies heavily on the number of service providers who seek job opportunities and career empowerment services on our platform. Our ability to attract and retain service providers depends on a number of factors, including:

 

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the number and quality of job opportunities that we provide to service providers;

 

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the service fees we charge for our services;

 

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the efficiency of our efforts to attract service providers;

 

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our ability to maintain, protect and enhance our brands;

 

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our ability to provide diversified and high-quality training courses;

 

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the market recognition of our accreditation service; and

 

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the competition for service providers with various home services market participants.

If we fail to attract and retain the service providers on our platform, our revenues may not grow and our business as well as operating results could suffer materially. Although we have not experienced major difficulties in attracting service providers to date, we cannot assure you that we will be able to continue to recruit, train and retain a sufficient number of service providers in the future. Failure to do so will have a material adverse effect on our business, financial condition and results of operations.

If we are unable to continue to provide a satisfactory experience to consumers and service providers, our business and reputation may be materially and adversely affected.

The success of our business hinges on our ability to provide a quality experience to consumers and service providers, which in turn depends on a variety of factors. These factors include our ability to provide a convenient

 

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and efficient platform to connect consumers and service providers, broaden service offerings on our platform, conduct cross-selling among various services and enhance the quality of home services provided by the service providers on our platform. For example, if service providers fail to provide quality home services to consumers or service providers are not satisfied with the quality of training courses we offer, our reputation and customer loyalty could be adversely affected.

In addition, we must continue to enhance and improve the functionality, effectiveness and features of mobile apps, including our Swan Daojia and Ayi One-click apps, in order to provide a satisfactory experience to consumers and service providers. The mobile internet and mobile applications are characterized by rapid technological evolution, changes in customer requirements and preferences, and the emergence of new industry standards and practices, any of which could render our mobile apps obsolete.

We cannot assure you that we can continue to provide a satisfactory experience to consumers and service providers as our business continues to evolve. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or user preferences, whether for technical, legal, financial or other reasons, consumers and service providers may choose other home services platforms over our platform, which could adversely and materially impact our reputation, business and results of operations.

Our business, financial condition and results of operations have been and may continue to be adversely affected by the COVID-19 pandemic.

The COVID-19 pandemic has created unique global and industry-wide challenges, including challenges to many aspects of our business. In 2020, the COVID-19 pandemic resulted in quarantines, travel restrictions, and the temporary closure of business venues and facilities in China. This caused the cancelation and termination of certain home services transactions for which we refunded service fees to consumers and service providers. As a result, the total gross transaction volume of home services transactions completed by us and home services agencies through our platform decreased to RMB8,828.2 million (US$1,347.4 million) in 2020 from RMB9,191.7 million in 2019.

We conduct our business primarily in China. Many of the quarantine and social distancing measures to address the COVID-19 pandemic in China had since been relaxed as of the date of this prospectus. We have resumed normal business operations and our performance, in terms of our key financial and operating metrics, has generally improved since the second half of 2020. However, we cannot assure you that our business will continue to grow at the same rate as it did prior to the COVID-19 pandemic. Moreover, relaxation of restrictions on economic and social activities may also lead to new cases, which may result in re-imposition of restrictions. If the situation regarding the COVID-19 pandemic deteriorates in China, our business, results of operations and financial condition could be materially and adversely affected.

If we fail to maintain our business relationships with industry participants, our business and growth prospects may suffer.

We provide SaaS-based solutions to other industry participants, such as home services agencies, to better manage their operations and provide quality home services while maximizing efficiency. We are also expanding our platform to allow other types of industry participants such as training institutions to join our SCN. Maintaining strong relationships with industry participants is critical to the results of operations and prospects of our solutions to industry participants business. We cannot assure you that the industry participants we currently maintain business relationships with will continue to use our solutions on commercially acceptable terms, or at all. In addition, our standardized infrastructure, and SaaS-based solutions, may not be accepted by other industry participants and our promotion of SCN may not be effective as we expect. Even if we are able to attract industry participants, their ability to maintain business relationships with us may be adversely affected by economic conditions, labor actions, regulatory or legal proceedings against them, natural disasters or other factors beyond our control. If we fail to attract new industry participants to cooperate with us due to any reason or fail to

 

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promote our standardized infrastructure as we expect, our business and growth prospects may be materially and adversely affected.

Consumers and service providers may circumvent our platform.

Despite our efforts to prevent them from doing so, consumers and service providers may circumvent our platform and engage with or pay each other through other means to avoid the service fees that we charge for transaction facilitation. In addition, service providers, after utilizing our platform to build their reputation and grow their clientele, could choose to market their services and skills and transact with consumers outside of our platform. If we are unable to prevent them from circumventing our platform, our business, prospects, financial condition and results of operations could be materially and adversely affected.

Our business is susceptible to changes in demand for home services in China.

We conduct our business primarily in China. Our business depends substantially on the development of China’s home services market. Demand for home services in China may fluctuate due to many factors, among others, including China’s overall economic growth, demographic transitions (such as changes in birth rate and aging population), and disposable income per household. While consumer demand for home services in China has grown rapidly in the past decade, we cannot assure you that such demand will continue to grow. Any social, economic and political changes that reduce disposable income or discretionary spending in China may affect consumers’ demand for home services, which in turn may have a material adverse effect on our overall business, financial condition, results of operations and prospects.

Maintaining and enhancing our brand and reputation is crucial to our business prospects. Any damage to our brand and reputation may have a material adverse effect on our results of operations, financial condition and business prospects.

We believe the Swan Daojia is well recognized as a leading home services platform and is associated with high-quality home services. Maintaining and enhancing the Swan Daojia brand is critical to our success, especially for the acquisition and retention of consumers and service providers. Our continued success in maintaining and enhancing our brand image depends to a large extent on our ability to satisfy the consumers’ needs, strengthen home services infrastructure, and respond to market competition. Unsuccessful marketing efforts, low-quality service offerings and unsatisfying user experience are likely to harm our brand image and value.

In addition, negative news or media coverage of our business, employees, service providers, brand ambassadors, directors and management or shareholders may adversely affect our reputation and business. We have from time to time received negative publicity, including negative internet and blog postings about our company, business and prospects, or directors and management. Certain of such negative publicity may come from malicious harassment or unfair competition by third parties. In addition, false positive or false negative checkup results provided by health checkup centers that we cooperate with may result in complaints by, disputes or legal proceedings with, consumers or service providers. Our brand and reputation may be materially and adversely affected, which in turn may cause us to lose market share as well as consumers and service providers and our results of operations and financial performance may be negatively affected.

If individual service providers who use our platform were to be classified as our employees instead of independent contractors, our business, financial condition and results of operations may be materially and adversely affected.

The independent contractor status of the service providers who use our platform may be challenged by government authorities in China. We enter into agreements with service providers as part of our onboarding procedures, under which we have a business cooperation relationship with service providers and provide them

 

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with home services job information through our platform. In addition, when a consumer selects a service provider to perform household staffing services, the consumer, service provider and we will enter into a service contract in which both the consumer and the service provider acknowledge that there is no employment or labor relationship between the service provider and us, and that we only provide information and technology services. Under the agreement that we enter into with a service provider for on-demand dispatch services, the service provider acknowledges that there is no employment or labor relationship between the service provider and us. Based on these agreements, we believe that the service providers on our platform are independent contractors and our relationship with them is consistent with the prevailing industry practices and recent government policies that allow internet platform service providers to create flexible working relationships with their associated workforce.

As of the date of this prospectus, we have not been investigated by governmental authorities, nor are we aware of any contemplated or forthcoming government action in relation to our relationship with service providers. However, we were involved in legal proceedings brought by third parties seeking compensation from us for injuries caused by or suffered by service providers on our platform during their provision of services and alleging that the service providers should be treated as our employees, rather than as independent contractors. We were also involved in claims by certain service providers stating that they should be treated as our employees. We have not been adjudicated to be the employer of any service provider to date by any courts or arbitration tribunals. However, we cannot assure you that we will not be subject to government investigations on or challenges to us in the future, nor can we assure you that we will be successful in defending the independent contractor status of service providers in the future if the laws, regulations and policies on the home services industries further evolve. If any service providers who use our platform are deemed as our employees by the PRC government, we may be required to make social insurance contribution for such employees or even indemnify such service providers against their losses incurred from service (if any), which could significantly increase our labor costs and adversely affect our financial condition and results of operations. Furthermore, the costs associated with defending, settling, or resolving pending and future government investigations and challenges or legal proceedings relating to the independent contractor status of service providers could be material to our business.

We could be subject to claims and suffer reputational harm if service providers provide inferior services, or cause property infringement or bodily injury to consumers, which may have a material adverse effect on our business, financial condition, results of operations and prospects.

We have standard and strict vetting procedures for service providers on our platform. We conduct background and health checks for service providers who use our household staffing and on-demand dispatch services. To the extent that service providers provide inaccurate or fraudulent information to us, results of our background checks and health checks may not be reliable.

It is difficult for us to effectively monitor the actions of service providers at all times. We cannot assure you that service providers will always perform services in a safe and quality manner. Any inferior services or inappropriate actions by service providers may materially and adversely affect our reputation, which may result in a material adverse effect on our business, results of operations and financial condition.

Specifically, we may be subject to claims for monetary damages and experience negative publicity if any property infringement or bodily injury is perpetrated by service providers to consumers. In the past, certain service providers we recommended to consumers have been the subject of various allegations, such as allegations of fraudulent acts, negligence or wrongdoing. Although we do not believe that we are directly responsible for a service provider’s wrongdoings, Chinese media could report such incidents and negatively affect our brand, or we could be held liable by Chinese courts or government agencies. These incidents and any similar incidents, or true or untrue claims of such incidents, could harm our reputation and impair our ability to attract and retain consumers. If we are unable to maintain a good reputation, further enhance our brand recognition, continue to cultivate consumer trust and increase the positive awareness of our platform, our reputation, brand, financial condition and results of operations may be materially and adversely affected.

 

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We may fail to compete effectively with other industry players, which could significantly reduce our market share and materially and adversely affect our business, financial condition and results of operations.

The business of providing home services in China is becoming increasingly competitive. Our competitors may be able to better position themselves to compete with us as the industry matures. We face competition in each of our primary business activities with other home services agencies in China, including national and regional players. Our competitors may have more established brand names and larger networks of consumers and service providers in certain regions in which we operate.

We also face competition from other companies that offer home services and career empowerment services. Any of these competitors may offer products and services with significant advantages in terms of performance, price, scope, creativity or other aspects. These services may achieve greater market acceptance than our service offerings, and thus weaken our brand. In addition, we may compete with these competitors in recruiting high-caliber personnel, especially for training teachers, computer programmers, engineers, sales and marketing personnel with experience in the internet and home services sectors. Increased competition in the home services and career empowerment services markets in China could make it difficult for us to retain existing consumers and service providers and attract new consumers and service providers, which in turn could lead to a decrease in our revenues and an increase in our costs and expenses.

Any of our current or future competitors may also receive investments from or enter into other commercial or strategic relationships with larger, well-established and well-financed companies which may have significantly greater financial, marketing and development resources than us. We cannot assure you that we will be able to compete successfully against our current or future competitors. Any failure to compete effectively in the home services market in China would have a material adverse effect on our business, financial condition and results of operations.

If we do not continue to innovate and keep pace with technological developments, our solutions to industry participants services may not remain competitive, and our revenues and results of operations may be materially and adversely affected.

We are a pioneer in promoting the infrastructure and standards in China’s home services industry. Through our platform, we have implemented a series of digitalization standards on data gathering and maintenance, transaction processes and service quality. Despite our success in capturing market opportunities from the digital transformation of China’s home services market, to remain competitive, we must continue to stay abreast of the continuously evolving industry trends and rapid technological developments. If we are unable to incorporate or adapt to new technologies and advancements in a cost-effective and timely manner in response to changing market conditions, whether for technical, legal, financial or other reasons, our business may be materially and adversely affected. For example, the market for SaaS solutions is still evolving, and our competitors may introduce new types of solutions and approaches to address the need of home services agencies. If we fail to upgrade our SaaS-based solutions in a timely manner or adapt our solutions to the needs of industry participants, our customer loyalty could be adversely affected.

Moreover, our success will depend partially on our ability to continuously identify, develop, acquire, protect or license advanced and new technologies that are valuable to our solutions and services. Although our research and development expenses decreased in 2020 as a result of our effort to optimize our research and development team following the completion of our foundational research and development work for our infrastructure and technologies, we will continue to invest resources in research and development to enhance our existing solutions and services. Failure to do so could render our existing solutions to industry participants obsolete and unappealing, which in turn may adversely affect our reputation, competitiveness, results of operations and prospects.

We cannot assure you that our new business initiatives will be successfully implemented.

Starting from 2017, we have been providing SaaS-based tools and solutions to other industry participants. In March 2019, we started to offer career empowerment services, such as skill advancement training, accreditation

 

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and well-being services, to service providers. We have a limited track record and experience in generating revenue from solutions to other industry participants and career empowerment services. We may not be able to leverage new technologies effectively or adapt our solutions to industry participants. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions, whether for technical, legal, financial or other reasons, our solutions to industry participants services may be materially and adversely affected.

In addition, we cannot assure you that we will be able to maintain our rate of growth of career empowerment services in the future. Various factors could prevent us from successful growth of career empowerment services, including (i) the inability to provide diversified training courses; (ii) the inability to increase enrollments in a cost-effective manner; (iii) negative publicity or perceptions regarding us; (iv) the inability to hire qualified tutors; and (v) adverse changes in relevant government policies or general economic conditions. If one or more of these factors reduce market demand for our services, our ability to grow our career empowerment services could be negatively affected.

If we fail to implement these new business initiatives, we may not be able to maintain or increase our revenue or recover any associated costs, expenses, and expenditures. In addition, we may in the future introduce new services to further diversify our revenue streams, including services with which we have little or no prior operating experience. We may not be able to effectively manage our growth and expansion and implement our business strategies. If these new or enhanced services fail to attract or retain users or to generate sufficient revenue to justify our investments, our business and results of operations may suffer.

If our collaboration with 58.com is terminated or curtailed, or if we are no longer able to benefit from the synergies of our business cooperation with 58.com, our business may be adversely affected.

58.com, one of our indirect shareholders, is a leading online marketplace for classifieds in China. Historically, we benefited from 58.com’s brand name and financial support. In November 2015, our shareholder, 58 Daojia Inc., entered into a business cooperation agreement with 58.com, pursuant to which 58.com agreed to cooperate with 58 Daojia Inc. in a number of areas, including branding collaboration, intellectual property licensing and information sharing. Under this agreement, 58.com agreed to provide 58 Daojia Inc. and its affiliated entities, including us, with the above-mentioned resources on a complimentary basis and the agreement does not have a specific term for such cooperation. We have been able to attract and retain consumers and service providers efficiently and draw significant traffic to our platform. During the period from 2018 to 2020, a majority of new registered consumers and new registered and verified service providers on our platform were acquired through channels separately from 58.com.

Currently, we are still using 58.com’s resources to acquire a portion of consumers and services providers on our platform pursuant to the business cooperation agreement. However, we cannot assure you that we will continue to maintain our cooperative relationship with 58.com and its affiliates in the future. To the extent we cannot maintain our cooperative relationship with 58.com on reasonable terms or at reasonable prices or at all, we will need to source other business partners to provide services, such as information sharing and traffic acquisition, which could result in material and adverse effects to our business and results of operations.

If we are no longer able to obtain authorization for the use of certain intellectual property from 58.com or its controlled affiliates, our business may be adversely affected.

We have been making efforts to promote our own brands and trademarks, including “Swan Home Services” and “Swan Daojia.” However, we cannot assure you that our promotion efforts will ultimately be successful, and these brands and trademarks will be successfully recognized by the market. We have been using certain intellectual property rights held by 58.com or its affiliates, such as trademarks and domain names, and thus the growth of our business may depend in part on our ability to acquire and maintain licenses or other rights to use these intellectual property rights. For example, certain key trademarks that we currently use, including “ ” are

 

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owned by an affiliated entity of 58.com. Our current license agreement with 58.com will expire in September 2021 and we are in the process of negotiating on an exclusive license agreement with indefinite terms for these trademarks. In addition, the domain name “www.daojia.com,” which is a major operating website of our business, is owned by an affiliated entity of 58.com, and we have obtained a long-term license for free from this owner through a domain name use licensing agreement. Furthermore, several social media accounts owned by the affiliated entities of 58.com are in the process of being transferred to us.

We cannot assure you that we will continue to be able to renew existing licenses that are critical to our business operations, or acquire new licenses of the intellectual property rights from 58.com or its affiliated entities on commercially reasonable terms or at all. Our competitors may also pursue strategies to license or acquire from 58.com the intellectual property rights that we may consider attractive or necessary. These competitors may have competitive advantages over us if they offer a price significantly higher than ours. Furthermore, 58.com may perceive us to be a competitor in certain areas and thus it may be unwilling to assign or license intellectual property rights to us. If we are unable to successfully obtain intellectual property rights from 58.com, or fail to maintain the existing intellectual property rights we have licensed from 58.com, we may have to abandon development in the relevant areas or invest in additional resources to promote our trademarks, which could have a material adverse effect on our business, financial condition, results of operations and prospects for growth.

We may have conflicts of interest with 58.com and, because of 58.com’s ownership interest in our company, we may not be able to resolve such conflicts on terms favorable to us.

58.com, one of our indirect shareholders, is a leading online marketplace for classifieds in China. The businesses of 58.com include online content, classifieds, real-estate listings, online recruitment and home services, which may compete with us directly or indirectly. As a result, conflicts of interest may arise between 58.com and us relating to our ongoing relationships. There may arise business opportunities in the future that both we and 58.com are interested in and which may complement each of our respective businesses. 58.com holds a large number of business interests, some of which may directly or indirectly compete with us.

If 58.com were to compete with us, our business, financial condition, results of operations, prospects and our use of certain intellectual properties owned by 58.com could be materially and adversely affected. Although we will become a stand-alone public company upon the completion of this offering and will have an audit committee consisting of independent nonexecutive directors to review and approve all proposed related party transactions, we may not be able to resolve all potential conflicts of interest, and even if we do so, the resolution may be less favorable to us.

Enforcement of labor laws and regulations and increases in labor costs in the PRC may adversely affect our business and our profitability.

Staff cost is the largest component in our cost structure. We expect that our staff cost, including salaries and employee benefits, will continue to increase and remain the largest component of our cost structure in the foreseeable future.

We have been subject to stricter regulatory requirements in terms of entering labor contracts with our employees and providing social insurance and benefits for employees. Pursuant to the PRC Labor Contract Law, as amended, and its implementation rules, employers are subject to various requirements in terms of signing labor contracts, minimum salaries, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. In the event that an employer decides to terminate employment agreement with an employee or otherwise change employment or labor practices, the PRC Labor Contract Law and its implementation rules may limit the employer’s ability to effect changes in a desirable or cost-effective manner.

 

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In addition, under the PRC Social Insurance Law and the Administrative Measures on Housing Provident Fund, employees are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance, housing provident funds, and employers are required, together with their employees or separately, to pay the contributions to social insurance and housing provident funds for their employees. Employers that fail to make adequate social insurance and housing provident fund contributions may be subject to late payment fees, fines and sanctions. We have accrued in our financial statements, but not made full contributions to the social insurance and the housing provident funds for employees as required by the PRC laws and regulations. In addition, if individual service providers were to be classified as our employees instead of independent contractors, such accruals and contributions would greatly increase. As of the date of this prospectus, we are not aware of any notice from regulatory authorities or any claim or request from these employees in this regard. If the competent PRC authorities determine that we are required to make supplemental contributions, that we are not in compliance with labor laws and regulations, or that we are subject to late payment fees, fines or other legal sanctions, such as order of timely rectification, our business, financial condition and results of operations may be adversely affected.

If our expansion into new geographical areas is not successful, our business and prospects may be materially and adversely affected.

As of March 31, 2021, we provided home services to consumers across China, and we operated 56 service centers in 30 cities in China, including Beijing, Shanghai, Guangzhou and Shenzhen, as well as provincial capitals and other economically developed cities. For the three months ended March 31, 2021, the total gross transaction volume of home services transactions in Beijing, Shanghai, Guangzhou and Shenzhen amounted to RMB697.9 million (US$106.5 million), representing approximately 41.6% of our total gross transaction volume. We have a track record of successfully expanding into new geographical areas and plan to expand our operations to more cities in China.

Geographic expansion is important for us to acquire more consumers and service providers and to attract more industry participants who operate in regional markets to join our SCN. Nonetheless, expansion into new geographical markets imposes additional burdens on our sales, marketing and general managerial resources. China is a large and diverse market, and business practices and demands may vary significantly. Our experience in the markets in which we currently operate may not be applicable in other parts of China. We cannot assure you, however, that we will be able to maintain this momentum in the future. As the conditions in any new geographic markets we enter may vary significantly, expansion into new geographical areas involves new risks and challenges. Our lack of familiarity with new geographical markets may make it more difficult for us to keep pace with the evolving market conditions. In addition, there may be one or more existing market leaders in any geographical area that we decide to expand into. Such companies may be able to compete more effectively than us by leveraging their experience in doing business in that market as well as their familiarity with the local service providers.

Our business is subject to seasonal fluctuations, which may cause our results of operations to fluctuate from quarter to quarter.

Our results of operations are affected by seasonal factors. We typically have lower revenues during the first quarter of the year due to Chinese New Year holidays, when there are fewer transactions and service orders on our platform. Our financial condition and results of operations for future quarters may continue to fluctuate and our historical quarterly results may not be comparable to future quarters. As a result, the trading price of the ADSs may fluctuate from time to time due to seasonality.

We rely on assumptions and estimates to calculate certain key operating metrics, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.

The number of transactions, the amount of gross transaction volume, the number of consumers, the number of service providers, the number of service providers’ enrollments and the number of training courses completed,

 

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among others, presented in this prospectus are based on internal company data. While these numbers are based on what we believe to be reasonable calculations for the applicable periods of measurement, there are inherent challenges in measuring usage and user engagement across our large user base. We treat each account as a separate user for the purposes of calculating our active users, because it may not always be possible to identify people that have set up more than one account. Accordingly, the calculations of our active users may not accurately reflect the actual number of consumers and service providers using our platform.

Our measures of user growth and user engagement may differ from estimates published by third parties or from similarly titled metrics used by our competitors due to differences in methodology. If consumers or service providers do not perceive our user metrics to be accurate representations of our user base or user engagement, or if we discover material inaccuracies in our user metrics, our reputation may be harmed. Consumers may be less willing to search for home services, and service providers may be less willing to seek job opportunities on our platform, which could negatively affect our business and operating results.

We have experienced occurrences of unexpected network interruptions. Such disruptions in the future would cause delays or interruptions of services, damage our reputation and result in a loss of consumers or service providers who use our platform, which could harm our business, operating results, and financial condition.

Our business depends heavily on the performance and reliability of China’s internet infrastructure, the continued accessibility of bandwidth and servers on our service providers’ networks and the continuing performance, reliability and availability of our technology. We also rely on cloud service operators to provide us with data communications capacity and internet data centers to host our servers. We have been in the past, and will likely be in the future, subject to unexpected interruptions, although to date no such interruptions has resulted in material damages or remediation costs. Major risks relating to our network infrastructure include, but are not limited to:

 

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any breakdown or system failure resulting in a sustained shutdown of our servers, including failures which may be attributable to sustained power shutdowns, or efforts to gain unauthorized access to our systems causing loss or corruption of data or malfunctions of software or hardware;

 

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any disruption or failure in the national network infrastructure, which would prevent our consumers and service providers from accessing our mobile applications;

 

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any loss of personal data, which could require us to pay fines or compensation to consumers or service providers;

 

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any damage from fire, flood, earthquake and other natural disasters; and

 

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computer viruses, hackings and similar events.

Any failure to maintain the satisfactory performance, reliability, security and availability of computer and hardware systems may cause significant harm to our reputation and our ability to attract and maintain consumers and visitor traffic.

We also do not maintain insurance policies covering losses relating to our systems and do not have business interruption insurance.

Our services, solutions and internal systems rely on software that is highly technical, and if it contains undetected errors or we fail to properly maintain or promptly upgrade our technology, our results of operations and financial condition may be materially and adversely affected.

Our platform and internal systems rely on software that is highly technical and complex. In addition, our platform and internal systems depend on the ability of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain,

 

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undetected errors or bugs. Errors or other design defects within the software on which we rely may result in a negative experience for our consumers, service providers and employees, delay introductions of new features or enhancements, result in errors or compromise our ability to protect user data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of consumers or service providers or liability for damages, any of which could adversely affect our business, results of operations and financial condition.

Actual or alleged failure to comply with data privacy and protection laws and regulations could have a serious adverse effect on our reputation, and discourage current and potential consumers and users from using our services and adversely affect our business.

Our business generates and processes a large quantity of personal, behavioral, transaction and demographic data. Concerns about our practices with regard to the collection, use or disclosure of personal information or other privacy-related matters, even if unfounded, could damage our reputation and operations.

We have formulated a user privacy policy and obtain consumers’ and service providers’ agreements to such policy when they open an account on, or log onto, our platform. While we have adopted a series of measures to comply with the laws and regulations relating to the protection of personal information in China, we cannot guarantee the effectiveness of these measures. Any failure or perceived failure to comply with all applicable data privacy and protection laws and regulations, any failure or perceived failure of our employees to comply with our internal control measures, may result in negative publicity and legal proceedings or regulatory actions against us, and could damage our reputation, discourage current and potential agents, consumers and service providers from using our services and subject us to fines and damages, which could have a material adverse effect on our business and results of operations.

Furthermore, the interpretation and application of personal information protection laws and regulations and standards are still uncertain and evolving. We cannot assure you that the governmental authorities will not interpret or implement the laws or regulations in ways that negatively affect us. In addition, it is possible that we may become subject to additional or new laws and regulations regarding the protection of personal information or privacy-related matters in connection with the data we have access to. Complying with additional or new regulatory requirements could force us to incur substantial costs or require us to change our business practices. In addition to the regulatory requirements, user attitudes towards data privacy are also evolving, and user concerns about the extent to which personal information is accessible to, used by or shared with consumers or service providers may adversely affect our ability to gain access to data. Any occurrence of the abovementioned circumstances may negatively affect our business and results of operations.

Security breaches could compromise sensitive information related to our business or prevent us from accessing critical information, which could adversely affect our business and our reputation.

Although we have implemented security measures to protect sensitive data from unauthorized access, use or disclosure, our information technology may be vulnerable to attacks by hackers or viruses. Computer viruses and hacking attacks may cause delays or other service interruptions and could result in significant damage to our hardware, software systems and databases, disruptions to our business activities, such as to our email and other communication systems, breaches of security and inadvertent disclosure of confidential or sensitive information, inadvertent transmissions of computer viruses and interruptions of access to our online platform through the use of denial-of-service or similar attacks. The inadvertent transmission of computer viruses could expose us to a material risk of loss or litigation and possible liability or reputation damage. All of our servers and routers, including back-up servers, are currently hosted by a major cloud operator in China, and all information on our website is backed up in a real time manner. Any hacking, security breach or other system disruption or failure which occurs in between our weekly backup procedures could disrupt our business or cause us to lose, and be unable to recover, data such as consumers’ or service providers’ profiles, contact information and other important transaction-related information, which in turn could adversely affect our business and reputation.

 

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The wide variety of payment methods that we accept subjects us to third-party payment-related risks.

We accept payments using a variety of methods, including online payments with credit cards and debit cards issued by major banks in China, and payment through third-party online payment platforms. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower our margins. We may also be susceptible to fraud and other illegal activities in connection with the various payment methods we offer.

Historically, we had engaged in collecting payments on behalf of service providers from consumers. This practice may be deemed as having provided payment settlement services, which may subject us to the requirement of obtaining a license from the competent government authority or to entrust qualified financial institutions to settle payments between service providers and consumers. As of the date of this prospectus, we have never been subject to any penalty or investigated by governmental authorities, nor are we aware of any contemplated or forthcoming government action, in this regard. However, we cannot assure you that we will not be subject to government investigations, penalties, or challenges in this regard in the future. In December 2020, we entered into an agreement with a commercial bank to cooperate on the billing, payment and escrow functions on our platform. The commercial bank that we work with is subject to the supervision by the People’s Bank of China. The People’s Bank of China may publish rules, guidelines and interpretations from time to time regulating the operation of financial institutions and payment service providers that may in turn affect the availability of services provided by such entities for us. If required by the People’s Bank of China or new legislation, the commercial bank may modify or suspend the services it offers to us, and we may be required to obtain additional license and incur additional expenses. If the People’s Bank of China or other governmental authorities deem our cooperation with the commercial bank as in violation of laws and regulations, we may be subject to penalties, fines, legal sanctions or suspension of the relevant functions on our platform. See “Regulation—Regulations Related to Payment Services.”

Any failure to protect our intellectual property rights could have a negative impact on our business.

We believe our intellectual property is critical to our success. Any unauthorized use or misuse of our intellectual property could harm our business. Historically, China’s protection of intellectual property rights has been less stringent and robust compared to that in other countries such as the United States. Infringement of intellectual property rights continues to pose a serious risk of doing business in China. Monitoring and preventing unauthorized use is difficult and the measures we take to protect our intellectual property rights may not be adequate. For example, copyright registration by itself may not be adequate protection from potential misuse, infringement or other challenges from third parties claiming rights on our intellectual property.

Furthermore, the application of laws governing intellectual property rights in China and other jurisdictions is uncertain and evolving, and could expose us to risks. If we are unable to adequately protect our trademarks and other intellectual property rights, or if the owners of the trademarks or other intellectual property rights that we use are unable to adequately protect them, we may lose these rights and our business may suffer materially. We typically impose contractual obligations on employees and consultants and have taken other precautionary measures to maintain the confidentiality of our proprietary information and restricted the use of the proprietary information other than for our company’s benefit. However, if our employees and consultants do not honor their confidentiality obligations or misappropriate our data and other proprietary information, our business would suffer as a result.

We may be subject to intellectual property infringement or misappropriation claims by third parties, which may force us to incur substantial legal expenses and, if determined adversely against us, could materially disrupt our business.

We cannot assure you that our trademarks, logos, trade names, technologies, training materials or any intellectual property developed or used by us do not or will not infringe intellectual property rights held by third

 

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parties. From time to time, we may be subject to legal proceedings and claims alleging infringement of patents, trademarks or copyrights, or misappropriation of creative ideas or formats, or other infringement of proprietary intellectual property rights. If any parties initiate litigation against us alleging infringement upon their intellectual property rights, defense against any of these or other claims would be both costly and time-consuming, and could significantly divert the efforts and resources of our management and other personnel.

In addition, we display information or content provided by third-party service providers who use our platform. In cases involving the unauthorized posting of copyrighted content by users on online platforms in China, there have been court proceedings but no settled court practice as to when and how hosting providers and administrators of an online platform can be held liable for the unauthorized posting by third parties of copyrighted material. Any such proceeding could result in significant costs to us and divert our management’s time and attention from the operation of our business, as well as potentially adversely impact our reputation, even if we are ultimately absolved of all liability.

We are required or may be required to obtain various operating licenses and permits and to make registrations and filings for our business and services in China; failure to comply with these requirements may materially and adversely affect our business operations.

Under PRC laws and regulations, we are required to obtain a number of licenses, permits and approvals from, and make filings or complete registrations with, government authorities in order to provide home services, internet information services and other value-added services to the users on our platform. The failure to obtain and/or maintain the licenses and permits required to conduct our business may subject us to various penalties, including confiscation of revenues, imposition of fines and/or restrictions on their business operations, or the discontinuation of their operations. Any such disruption in the business operations of our consolidated VIEs could materially and adversely affect our business, financial condition and results of operations.

We are required to obtain a value-added telecommunications license in order to provide internet information services. See “Regulation—Regulations Related to Value-added Telecommunications Services.” Our VIEs have obtained value-added telecommunications service licenses. However, we cannot assure you that we will be able to successfully maintain these value-added telecommunication licenses or complete the updating and renewal of the filing records of our value-added telecommunication licenses with local counterparts of the Ministry of Industry and Information Technology, or the MIIT, on a timely basis. Failure to maintain and renew the value-added telecommunication licenses may subject us to penalties, including discontinuation of operations, correction order, fines and other regulatory liabilities, which could materially and adversely affect our business operations.

We issue prepaid cards which can be used to purchase the housekeeping services on our platform. These cards may be deemed to be multiple-purpose commercial prepaid cards, and if so, we may be required to obtain a license from the competent government authority or to entrust qualified payment service providers to manage prepaid cards and process the settlements of payments. Failure to comply with such requirement may subject us to potential penalties. See “Regulation—Regulations Related to Payment Services.” We have entered into a cooperation agreement with a qualified payment service provider to manage our prepaid cards and are in the process of developing a prepaid cards system.

Our training services to service providers may be subject to various PRC laws and regulations. Pursuant to the Law for Promoting Private Education, which was last amended on December 29, 2018, the establishment of private schools that engage in training for vocational qualification and skills must be approved by the competent local government agencies. However, the Law for Promoting Private Education does not explicitly define the scope of training for vocational qualification and skills. In June 2021, the Standing Committee of the National People’s Congress promulgated the Vocational Education Law of the PRC (Revised Draft), or the Revised Draft Vocational Education Law, for soliciting comments. Under the Revised Draft Vocational Education Law, a vocational training institution can issue qualification certificates, which serve as professional certificates according to relevant PRC laws and regulations, to students after students complete the vocational training and pass the required examinations. As we do not issue such qualification certificates to service providers for our training courses, we believe our training services are not the training for vocational qualification or skills for the

 

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purpose of issuing the qualification certificates that the Revised Draft Vocational Education Law is intended to regulate. However, since the local government authorities have significant discretion in interpreting and implementing such laws and regulations, we cannot assure you that they would not take a different view with us and thus conclude that we are a vocational training institution and require us to obtain the private school operation permit. In addition, the amended Regulations on the Implementation of the Law for Promoting Private Education of the PRC, which was promulgated by the State Council on April 7, 2021 and will become effective on September 1, 2021, requires a private school engaging in online education activities to obtain a private school operation permit. See “Regulations—Regulations Related to Private Vocational Education.” However, this new regulation does not specify the requirements that an institution engaged in online vocational skills training, like us, must satisfy in order to obtain a private school operation permit. If we are not able to comply with the permit requirements or other regulatory requirements under such new regulation and any additional related rules and regulations, if any, in a timely manner or at all, we may be subject to fines, confiscation of the gains derived from our operations, suspension of our non-compliant operations or claims for compensation of any economic loss suffered by service providers.

We may be required to obtain additional licenses or permits from, or make registration or filings, such as permit for production and operation of radio and branch offices registration, with competent governmental authorities. For example, we have obtained a permit for production and operation of radio. Moreover, we may be required to apply for licenses for online transmission of audio-visual programs or online publishing service permit for our online vocational skills training services. As of the date of this prospectus, there are no implementation rules, interpretations from government authorities or prevailing enforcement practices that would deem our online vocational skills training services as “internet audio-visual program” or “online publishing” which requires a license for online transmission of audio-visual programs or online publishing service permit or that would deem our sales of vocational skills training courses through our applications as “live-streaming for e-commerce” services that require a filing with the local branch of National Radio and Television Administration. However, there is no assurance that local PRC authorities will not adopt different enforcement practices, or that any PRC government will not issue more explicit interpretations and rules or promulgate new laws and regulations from time to time to further regulate the provision of online vocational skills training, which may subject us to additional license requirements to continue to operate our business. Failure to obtain or maintain such licenses may subject us to fines, confiscation of relevant gains, suspension of the operations of certain functions of our applications and online platforms.

There can be no assurance that we will be able to procure, maintain and renew such additional licenses, permits and filings in a timely manner or at all. If we are not able to obtain or renew such license, we may be subject to fines, confiscation of relevant gains, legal sanctions or an order to suspend our services.

We may be subject to penalties for information displayed on our platform.

The PRC government has adopted regulations governing the distribution of information over the internet. For example, advertisements for certain medical services may not be published without review and approval by the competent government agencies. If any third-party service providers use our platform to display advertisements for which the required approval has not been obtained, we may be subject to penalties. Any violation of the laws and regulations on distribution of information on our platform, if material or not rectified, may subject us to administrative penalties, impair our brand image, and materially and adversely impact our business, financial condition, results of operations and prospects.

We may need to raise additional funds to finance our future capital needs, which may dilute the value of our outstanding ordinary shares or prevent us from growing our business.

We intend to continue to make investments to support our business and may require additional funds. Accordingly, we may need to engage in equity or equity-linked financings to secure additional funds. If we raise additional funds through the sale of equity or equity-linked securities, our current shareholders’ percentage ownership will be reduced. In addition, these transactions may dilute the value of our outstanding ordinary shares. We may have to issue securities that may have rights, preferences and privileges senior to our ordinary

 

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shares. Any equity-linked securities that we may secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. We cannot assure you that we will be able to raise additional funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs, which would have a material adverse effect on our business plans, prospects, results of operations and financial condition.

Our business and growth could suffer if we are unable to hire and retain key personnel.

We depend on the continued contributions of our senior management and other key employees, many of whom are difficult to replace. The loss of the services of any of our executive officers or other key employees could harm our business. Competition for qualified talent in China is intense. Our future success is dependent on our ability to attract a significant number of qualified employees and retain existing key employees. If we are unable to do so, our business and growth may be materially and adversely affected and the trading price of our ADSs could suffer. Our need to significantly increase the number of our qualified employees and retain key employees may cause us to materially increase compensation-related costs, including share-based compensation.

In particular, we are dependent on the services of Mr. Xiaohua Chen, our founder and chairman. Although Mr. Chen spends significant time with us and is active in the management of our business, he does not devote his full time and attention to us. If Mr. Chen reduces his time with us in the future and becomes less involved with the management of our business, we may no longer benefit from his extensive industry experience and our business and growth may suffer. In addition, we do not have “key person” insurance policies covering Mr. Chen, and we therefore have no way of mitigating our financial loss were we to lose his services.

We are subject to risks relating to our leased properties.

Currently, most of our facilities are on leased premises. We may not be able to successfully maintain, extend or renew our leases upon the expiration of the current term on commercially reasonable terms or at all, and may therefore be forced to relocate to new offices. In addition, we may not be able to lease properties in our desired locations.

We have entered into certain lease agreements with parties who have not provided evidence of proper legal title to the leased premises or authorization from the legal owners for sublease of the premises, and some of our leased premises have been mortgaged by the owners to third parties such as banks. If such parties are not the legal owners, or if they have not obtained the proper authorization from the legal owners of the premises, or if any mortgagees challenge our right to use the leased premises, we might be forced to relocate. We also have not registered certain of our lease agreements with the competent government authorities. Under the PRC laws and regulations, we may be required to register and file with the relevant government authority executed leases. Failure to register the lease agreements for our leased properties will not affect the validity of these lease agreements, but housing authorities may order us to register the lease agreements in a prescribed period of time and impose a fine up to RMB10,000 for each non-registered lease if we fail to complete the registration within the prescribed timeframe.

We have granted, and may continue to grant, options, restricted share units and other forms of share-based incentive awards, which may result in increased share-based compensation and you will incur immediate and substantial dilution.

Our principal shareholder, 58 Daojia Inc., adopted its 2015 Share Incentive Plan, or the 2015 Plan, in February 2015. The share-based compensation expenses, which were incurred in connection with the awards under the 2015 Plan and allocated to us, amounted to RMB0.4 million, RMB0.2 million, nil and nil for the years ended December 31, 2018, 2019 and 2020 and for the three months ended March 31, 2021, respectively. We adopted our 2019 Share Incentive Plan, or the 2019 Plan, in February 2020 for the purpose of granting share-

 

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based compensation awards to employees, directors and consultants to incentivize their performance and align their interests with ours. Under the 2019 Plan, the maximum aggregate number of shares that may be issued pursuant to all awards is 35,587,342 ordinary shares. For the year ended December 31, 2020 and the three months ended March 31, 2021, no share-based compensation expenses was recognized under our 2019 Plan. As of the date of this prospectus, options to purchase 30,149,454 ordinary shares are outstanding under the 2019 Plan. Shortly after this offering, concurrently with the share distribution by 58 Daojia Inc., we will cancel 39,856,586 ordinary shares held by 58 Daojia Inc. and, at the same time, increase the maximum number of ordinary shares reserved under the 2019 Plan by 39,856,586. In July 2021, we adopted the 2021 Share Incentive Plan, or the 2021 Plan, which will become effective immediately prior to the completion of this offering. Under the 2021 Plan, the maximum aggregate number of ordinary shares available for issuance is initially two percent (2%) of our ordinary shares of our outstanding immediately upon completion of this offering. We expect to grant awards under our share incentive plan, which we believe is of significant importance to our ability to attract and retain key personnel and employees. Any grant of awards under our share incentive plans will result in immediate dilution to our existing shareholders’ interests, which may have a dilutive impact on our existing shareholders, and could in turn negatively affect the value of your ADSs. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

We have limited insurance coverage which could expose us to significant costs and business disruption.

The insurance industry in China is still in an early stage of development and PRC insurance companies offer only limited business insurance products. As a result, we do not have any business disruption insurance, property insurance or litigation insurance coverage for our operations in China. Any uninsured business disruption, litigation or natural disaster may cause us to incur substantial costs and result in the diversion of our resources, as well as significantly disrupt our operations, and have a material adverse effect on our business, financial position and results of operations.

Potential strategic investments, acquisitions or new business initiatives may disrupt our ability to manage our business effectively.

Strategic investments, acquisitions or new business initiatives and any subsequent integration of new companies or businesses will require significant attention from our management, in particular to ensure that such changes do not disrupt any existing collaboration, or affect our consumers’ opinion and perception of our services. In addition, in the case of acquisitions or new business initiatives our management will need to ensure that the acquired or new business is effectively integrated into our existing operations. The diversion of our management’s attention and any difficulties encountered during integration could have a material adverse effect on our ability to manage our business. In addition, strategic investments, acquisitions or new business initiatives could expose us to potential risks, including:

 

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risks associated with the assimilation of new operations, services, technologies and personnel;

 

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unforeseen or hidden liabilities;

 

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the diversion of resources from our existing businesses and technologies;

 

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implementation or remediation of controls, procedures and policies at the acquired company;

 

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the inability to generate sufficient revenues to offset the costs and expenses of the transaction; and

 

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potential loss of, or harm to, relationships with employees and marketplace users as a result of the integration of new businesses or investment.

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business, results of operations and financial condition.

 

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Our failure to implement and maintain effective internal control over financial reporting could result in failure to accurately report our financial results or prevent fraud, or result in material misstatements in our financial statements which could require us to restate financial statements, or cause investors to lose confidence in our reported financial information and have a negative effect on the price of the ADSs.

Prior to this offering, we had been a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. In the course of auditing our consolidated financial statements included in this prospectus, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness identified relates to the lack of sufficient competent financial reporting and accounting personnel with appropriate understanding of U.S. GAAP to design and implement formal period-end financial reporting controls and procedures, to address complex U.S. GAAP technical accounting issues, and to prepare and review our consolidated financial statements and related disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the SEC. We have implemented and are continuing to implement a number of measures to address the material weakness that has been identified. For details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control over Financial Reporting.” However, we cannot assure you that we will be able to continue implementing these measures in the future, or that we will not identify additional material weaknesses in the future.

Upon completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2022. In addition, once we cease to be an “emerging growth company” as such term is defined under the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Generally, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of the ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.

 

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We and our management are subject to risks relating to litigation, disputes and regulatory investigations which could have a material adverse impact on our reputation, business prospects, operating results and financial condition.

We are, and may from time to time in the future be, subject to litigation, disputes and regulatory investigations in the ordinary course of our business. We are also subject to risks relating to legal and regulatory proceedings and investigations which our directors and officers, or our other affiliates, may be a party to from time to time. Claims arising out of actual or alleged violations of law could be asserted against us, our directors and officers, or our other affiliates by government or customers, service providers, competitors, regulatory authorities or investors, in civil, criminal, or regulatory investigations and proceedings. For example, our chief financial officer, was previously named as a defendant in a putative securities class action lawsuit filed in the U.S. against a formerly Nasdaq-listed company, or the defendant company, in which she held the position of chief financial officer before joining us, alleging violations of federal securities laws. The plaintiffs have agreed, among other things, to settle, release and waive all future claims against the defendant company and our chief financial officer, who denied any liability or wrongdoing, based on the same or similar allegations asserted in the class action lawsuit. The class action lawsuit related to certain alleged acts of corporate bribery involving the chief executive officer of the defendant company and another executive of a subsidiary of the defendant company. Although both these individuals were subsequently convicted and sentenced to various terms of imprisonment, and the relevant subsidiary was convicted and fined, our chief financial officer was not named in, involved in or otherwise subject to any criminal proceedings. However, any lawsuit, allegation or legal proceeding, with or without merit, or any perceived unfair, unethical, fraudulent or inappropriate business practice by us or perceived wrong-doing by any director or key member of our management team could harm our reputation, cause our customer base to decline and adversely affect the trading price of our ADSs and ordinary shares.

We cannot assure you that we will always be successful in defending ourselves in legal and administrative actions or in asserting our rights under various laws. Even if we are successful in our attempt to defend ourselves in legal and administrative actions or to assert our rights under various laws, enforcing our rights against the various parties involved may be expensive, time-consuming and ultimately futile. These actions could expose us to negative publicity and to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including, but not limited to, suspension or revocation of licenses to conduct business. All of these could have a material adverse impact on our business, operating results and financial condition.

We are subject to changing laws and regulations regarding regulatory matters, corporate governance and public disclosure that have increased both our costs and the risk of non-compliance.

We are subject to rules and regulations by various governing bodies, including, for example, the Securities and Exchange Commission, or the SEC, which is charged with the protection of investors and the oversight of companies whose securities are publicly traded, and the various regulatory authorities in China and the Cayman Islands, and to new and evolving regulatory measures under applicable law. Our efforts to comply with new and changing laws and regulations have resulted in and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

Moreover, because these laws, regulations and standards are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. If we fail to address or comply with these regulations or any subsequent changes, we may be subject to penalty and our business may be harmed.

 

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Risks Relating to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

Foreign investment in the value-added telecommunication services industry in China is extensively regulated and subject to numerous restrictions. Pursuant to the Special Administrative Measures (Negative List) for Foreign Investment Access (2020), or the 2020 Negative List, published by the National Development and Reform Commission, or the NDRC, and the Ministry of Commerce on June 23, 2020 and effective on July 23, 2020, with a few exceptions, foreign investors are not allowed to own more than 50% of the equity interests in a value-added telecommunication service provider and any such foreign investor must have experience in providing value-added telecommunications services overseas and maintain a good track record.

We are a Cayman Islands company and our PRC subsidiaries are currently considered foreign-invested enterprises. Accordingly, our PRC subsidiaries are not eligible to provide value-added telecommunication services in China. To ensure strict compliance with the PRC laws and regulations, we conduct such business activities through our VIEs, namely Youxiang VIE, Daojia VIE and Haodaojia VIE. Each of Changsha Daojia Youxiang Network Technology Co., Ltd., or Changsha WFOE, and Tianjin Wuba Daojia Information Technology Co., Ltd., or Tianjin WFOE, which are our wholly owned subsidiaries in China, has entered into a series of contractual arrangements with our relevant VIEs and their shareholders, respectively. These contractual arrangements enable us to (i) exercise effective control over our VIEs, (ii) receive substantially all of the economic benefits of our VIEs, and (iii) have an exclusive option to purchase all or part of the equity interests in and assets of our VIEs when and to the extent permitted by PRC laws. As a result of these contractual arrangements, we have control over and are the primary beneficiary of our VIEs and hence consolidate their financial results as our VIEs under U.S. GAAP. See “Corporate History and Structure” for further details.

If the PRC government finds that our contractual arrangements do not comply with its restrictions on foreign investment in the value-added telecommunication services, or if the PRC government otherwise finds that we, our VIEs, or any of their subsidiaries are in violation of PRC laws or regulations or lack the necessary permits or licenses to operate our business, the competent PRC regulatory authorities, including the MIIT and the State Administration for Market Regulation, would have broad discretion in dealing with such violations or failures, including, without limitation:

 

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revoking the business licenses and/or operating licenses of such entities

 

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discontinuing or placing restrictions or onerous conditions on our operation through any transactions between our PRC subsidiaries and our VIEs;

 

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imposing fines, confiscating the income from our PRC subsidiaries or our VIEs, or imposing other requirements with which we or our VIEs may not be able to comply;

 

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requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIEs and deregistering the equity pledges of our VIEs, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our VIEs; or

 

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restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in China.

Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If any of these occurrences results in our inability to direct the activities of our VIEs that most significantly impact its economic performance and/or our failure to receive the economic benefits from our VIEs, we may not be able to consolidate the entity in our financial statements in accordance with U.S. GAAP.

 

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Uncertainties exist with respect to the interpretation and implementation of the newly enacted Foreign Investment Law and how it may impact our business, financial condition and results of operations.

On March 15, 2019, the National People’s Congress of the PRC promulgated the Foreign Investment Law of the PRC, or the Foreign Investment Law, which became effective on January 1, 2020 and replaced the existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law of the PRC, the Sino-foreign Cooperative Joint Venture Enterprise Law of the PRC and the Wholly Foreign-invested Enterprise Law of the PRC, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The Foreign Investment Law does not mention concepts such as “actual control” and “controlling PRC companies by contracts or trusts” that were included in the previous drafts, nor does it specify regulation on controlling through contractual arrangements, and thus this regulatory topic remains unclear under the Foreign Investment Law. On December 26, 2019, the State Council issued the Implementation Regulations for the Foreign Investment Law, or the Implementation Regulations, which became effective on January 1, 2020. The Implementation Regulations restate certain principles of the Foreign Investment Law and also provide that foreign investments in sectors on the 2020 Negative List are required to comply with special management measures in respect of shareholding, senior management personnel and other matters stipulated under the 2020 Negative List. However, uncertainties exist in relation to the interpretation and implementation of the Foreign Investment Law and the Implementation Regulations. For instance, though the Foreign Investment Law does not explicitly classify contractual arrangements as a form of foreign investment, it contains a catch-all provision under the definition of “foreign investment,” which includes investments made by foreign investors in China through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, such as unwinding our existing contractual arrangements and/or disposal of our related business operations, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, corporate governance and business operations. For further information on the Foreign Investment Law and the Implementation Regulations, see “Regulation—Regulations Related to Foreign Investment.”

We rely on contractual arrangements with our VIEs and their shareholders for a large portion of our business operations, which may not be as effective as direct ownership in providing operational control.

We primarily have relied and expect to continue to rely on contractual arrangements with our VIEs and their respective shareholders to operate our business in China. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIEs. For example, our VIEs and their shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests. If we had direct ownership of our VIEs, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIEs, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our VIEs and their shareholders of their respective obligations under the contracts to exercise control over our VIEs. The shareholders of our VIEs may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portions of our business through the contractual arrangements with our VIEs. If any disputes relating to these contracts remain unresolved, we will have to enforce our rights under these contracts through the operations of PRC laws and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. Therefore, our contractual arrangements with our VIEs may not be as effective in ensuring our control over those portions of our business operations as direct ownership would be.

 

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Any failure by any of our VIEs or their shareholders to perform their respective obligations under our contractual arrangements with them would have a material and adverse effect on our business.

If any of our VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may be limited in our ability to enforce the contractual arrangements that give us effective control over our VIEs, and if we are unable to maintain such control, our ability to consolidate the financial results of our VIEs will be affected. We may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC laws. For example, if the shareholders of any of our VIEs refuse to transfer their equity interest in such VIEs to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they otherwise act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations. In addition, if any third parties claim any interest in such shareholders’ equity interests in any of our VIEs, our ability to exercise shareholders’ rights or foreclose the share pledge according to the contractual arrangements may be impaired. If these or other disputes between the shareholders of our VIEs and third parties were to impair our control over our VIEs, our ability to consolidate the financial results of our VIEs would be affected, which would in turn result in a material adverse effect on our business, operations and financial condition.

In addition, the shareholders of our VIEs may be involved in personal disputes with third parties or other incidents that may have an adverse effect on their respective equity interests in our VIEs and the validity or enforceability of the contractual arrangements. For instance, in the event that such shareholder divorces his or her spouse, the spouse may claim that the equity interest of our VIEs held by such shareholder is part of their marital or community property and should be divided between such shareholder and his or her spouse. If such claim is supported by the competent court, the equity interest may be obtained by the shareholder’s spouse or another third party who is not bound by our contractual arrangements, which could result in our losing effective control over our VIEs. Even if we receive a consent letter from the spouse of a nominee shareholder of our VIEs where such spouse undertakes that he or she would not take any actions to interfere with the contractual arrangements through which we control such VIEs, including by claiming that the equity interest of our VIEs held by such shareholder is part of their marital or community property, we cannot assure you that these undertakings will be complied with or effectively enforced. In the event that any of them is breached or becomes unenforceable and leads to legal proceedings, it could disrupt our business, distract our management’s attention and subject us to substantial uncertainties as to the outcome of any such legal proceedings. Similarly, if any of the equity interests of our VIEs are inherited by a third party on whom the current contractual arrangements are not binding, we could lose our control over our VIEs or have to maintain such control at unpredictable cost, which could cause significant disruption to our business operations and harm our financial condition and results of operations.

Our contractual arrangements are governed by PRC laws. Accordingly, these contracts would be interpreted in accordance with PRC laws, and any disputes would be resolved in accordance with PRC legal procedures.

The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delays or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIEs, and our ability to conduct our business may be negatively affected.

 

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The shareholders of our VIEs may have actual or potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

The shareholders of our VIEs, Mr. Xiaohua Chen and Mr. Jinbo Yao, may have actual or potential conflicts of interest with us. These shareholders may refuse to sign or breach, or cause our VIEs to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIEs, which would have a material and adverse effect on our ability to effectively control our VIEs and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with our VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Mr. Jinbo Yao, a nominee shareholder of each of our VIEs, is also the chairman, chief executive officer, and a principal shareholder of 58.com. These relationships could create, or appear to create, conflicts of interest when Mr. Jinbo Yao is faced with decisions with potentially different implications for 58.com and us. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

Contractual arrangements in relation to our VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that we or our VIEs owe additional taxes, which could negatively affect our financial condition and the value of your investment.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities determine that the VIE contractual arrangements were not entered into on an arm’s-length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of our VIEs in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIEs for PRC tax purposes, which could in turn increase its tax liabilities without reducing our PRC subsidiaries’ tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on our VIEs for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our VIEs’ tax liabilities increase or if it is required to pay late payment fees and other penalties.

We may lose the ability to use, or otherwise benefit from, the licenses, approvals and assets held by our VIEs, which could severely disrupt our business, render us unable to conduct some or all of our business operations and constrain our growth.

As part of our contractual arrangements with our VIEs, our VIEs hold certain assets, licenses and permits that are material to our business operations, such as the internet information service license. The contractual arrangements contain terms that specifically obligate VIEs’ shareholders to ensure the valid existence of the VIEs and restrict the disposal of material assets of the VIEs. However, in the event the VIEs’ shareholders breach the terms of these contractual arrangements and voluntarily liquidate our VIEs, or our VIEs declare bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit from the assets held by the VIEs, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, if any of our VIEs undergoes a voluntary or involuntary liquidation proceeding, its shareholders or unrelated third-party creditors may claim rights to some or all of the assets of such VIE, thereby hindering our ability to operate our business as well as constrain our growth.

 

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Risks Relating to Doing Business in China

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.

Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally and by continued economic growth in China as a whole.

The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

While the Chinese economy has experienced significant growth over past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to a reduction in demand for our services and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and operating results.

Uncertainties with respect to the PRC legal system could adversely affect us.

The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value. The PRC legal system is evolving rapidly, and the interpretations of many laws, regulations and rules may contain inconsistencies and enforcement of these laws, regulations and rules involves uncertainties.

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.

Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have a retroactive effect. As a result, we may not be

 

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aware of our violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions within the United States against us or our management named in the prospectus based on foreign laws. It may also be difficult for overseas regulators or you to conduct investigations or collect evidence within China.

We are an exempted company incorporated under the laws of the Cayman Islands. However, we conduct substantially all of our operations in China, and substantially all of our assets are located in China. In addition, all of our directors and officers are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to enforce judgments obtained in U.S. courts against us or them, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors.

The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of written arrangement with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.

It may also be difficult for you or overseas regulators to conduct investigations or collect evidence within China. For example, in China, there are significant legal and other obstacles to providing information, documents and materials needed for regulatory investigations or litigation outside China or otherwise with respect to foreign entities. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such regulatory cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC, and without the consent by the Chinese securities regulatory authorities and the other competent governmental agencies, no entity or individual may provide documents or materials related to securities business to any foreign party. While detailed interpretation of or implementing rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests. See also “—Risks Relating to the ADSs and This Offering—You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.”

We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.

We are a Cayman Islands holding company and we rely principally on dividends and other distributions on equity from our PRC subsidiaries for our cash requirements, including for services of any debt we may incur.

 

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The ability of our PRC subsidiaries to pay dividends and other distributions on equity, in turn, depends on the payment they receive from our VIEs as service fees pursuant to certain contractual arrangements among our PRC subsidiaries, our VIEs and our VIEs’ shareholders entered into to comply with certain restrictions under PRC laws on foreign investment. For more information about such contractual arrangements, see “Corporate History and Structure—Contractual Arrangements with Our VIEs.”

Our PRC subsidiaries’ ability to distribute dividends is based upon its distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to its respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries, our VIEs and their subsidiaries are required to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. These reserves are not distributable as cash dividends. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our PRC subsidiaries to distribute dividends or other payments to their respective shareholders could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business.

To address the persistent capital outflow and the RMB’s depreciation against the U.S. dollar in the fourth quarter of 2016, the People’s Bank of China and the State Administration of Foreign Exchange, or SAFE, have implemented a series of capital control measures in the subsequent months, including stricter vetting procedures for China-based companies to remit foreign currency for overseas acquisitions, dividend payments and shareholder loan repayments. For instance, the Circular on Promoting the Reform of Foreign Exchange Management and Improving Authenticity and Compliance Review, or SAFE Circular 3, issued on January 26, 2017, provides that the banks are required to, when dealing with dividend remittance transactions from domestic enterprise to its offshore shareholders of more than US$50,000, review the relevant board resolutions, original tax filing form and audited financial statements of such domestic enterprise based on the principal of genuine transaction. The PRC government may continue to strengthen its capital controls and our PRC subsidiaries’ dividends and other distributions may be subject to tightened scrutiny in the future. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

In addition, the PRC Enterprise Income Tax Law enacted by the National People’s Congress and the Implementing Rules of the Enterprise Income Tax Law promulgated by the State Council, or collectively, the PRC EIT Law, provide that a withholding tax at a rate of 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless reduced under treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC resident enterprises are tax resident.

The custodians or authorized users of our controlling non-tangible assets, including chops and seals, may fail to fulfill their responsibilities, or misappropriate or misuse these assets.

Under the PRC laws, legal documents for corporate transactions, including agreements and contracts are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with PRC industry and commerce authorities.

In order to secure the use of our chops and seals, we have established internal control procedures and rules for using these chops and seals. In any event that the chops and seals are intended to be used, the responsible personnel will submit the application which will then be verified and approved by authorized employees in accordance with our internal control procedures and rules. In addition, in order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to authorized employees.

 

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Although we monitor such authorized employees, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our employees could abuse their authority, for example, by entering into a contract not approved by us or seeking to gain control of one of our subsidiaries or VIEs. If any employee obtains, misuses or misappropriates our chops and seals or other controlling non-tangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources to resolve and divert management from our operations.

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries and to make loans to our VIEs, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

Any funds we transfer to our PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, as well as any loans we provide to our VIEs, are subject to reporting with or approval by or registration with governmental authorities in China. According to the PRC regulations on foreign-invested enterprises, or FIEs, in China, capital contributions to our PRC subsidiaries are subject to the reporting with or approval of or filing with the Ministry of Commerce or its local branches and registration with a local bank authorized by SAFE. In addition, (i) any foreign loan procured by our PRC subsidiaries is required to be registered with SAFE or its local branches and (ii) any of our PRC subsidiaries may not procure loans which exceed the difference between its total investment amount and registered capital or, as an alternative, only procure loans subject to the calculation approach and limitation as provided in the Notice of the People’s Bank of China on Matters concerning the Macro-Prudential Management of Full-Covered Cross-Border Financing, or PBOC Notice No. 9. Additionally, any medium or long-term loans to be provided by us to our VIEs must be registered with the NDRC and with SAFE or its local branches. We may not be able to obtain these government approvals or complete such reporting or registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by us to our PRC subsidiaries or loans by us to our VIEs. If we fail to receive such approvals or complete such reporting, registration or filing, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

On March 30, 2015, SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19, which took effect as of June 1, 2015. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capital for expenditure beyond their business scopes, providing entrusted loans or repaying loans between nonfinancial enterprises. SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or SAFE Circular 16, effective in June 2016. Pursuant to SAFE Circular 16, enterprises registered in China may also convert their foreign debts from foreign currency to Renminbi at their own discretion. SAFE Circular 16 provides an integrated standard for conversion of foreign exchange under capital account items (including, but not limited to, foreign currency capital and foreign debts) for all enterprises registered in China at their own discretion. SAFE Circular 16 reiterates the principle that Renminbi converted from foreign currency-denominated capital of a company may not be directly or indirectly used for purposes beyond its business scope or prohibited by PRC laws or regulations, while such converted Renminbi may not be provided as loans to its non-affiliated entities. On October 23, 2019, the SAFE promulgated the Notice of the State Administration of Foreign Exchange on Further Promoting the Convenience of Cross-border Trade and Investment, or the SAFE Circular 28, which, among other things, allows all foreign-invested companies to use Renminbi converted from foreign currency-denominated capital for equity investments in China, as long as the equity investment is genuine, does not violate applicable laws, and complies with the negative list on foreign investment. However, since the SAFE Circular 28 is relatively new, it is unclear how SAFE and competent banks will carry this out in practice. SAFE Circular 19, Circular 16 and Circular

 

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28 may significantly limit our ability to use Renminbi converted from the net proceeds of this offering to fund the establishment of new entities in China by our VIEs or their subsidiaries, to invest in or acquire any other PRC companies through our PRC subsidiaries, or to establish new VIEs in China, which may adversely affect our business, financial condition and results of operations.

Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.

The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. The value of Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. We cannot assure you that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.

Any significant appreciation or depreciation of Renminbi may materially and adversely affect our revenues, earnings and financial position, and the value of, and any dividends payable on, our ADSs in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive into Renminbi to pay our operating expenses, appreciation of Renminbi against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, a significant depreciation of Renminbi against the U.S. dollar may significantly reduce the U.S. dollar equivalent of our earnings, which in turn could adversely affect the price of our ADSs. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries and VIEs to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

Certain PRC regulations may make it more difficult for us to pursue growth through acquisitions.

Among other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, established

 

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additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor acquires control of a PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, issued by the State Council in 2008, are triggered. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the National People’s Congress which became effective in 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by competent governmental authorities before they can be completed. On February 7, 2021, the Anti-monopoly Commission of the State Council issued the Anti-monopoly Guidelines for the Internet Platform Economy Sector that specifies some of the activities of internet platforms that may be identified as monopolistic and concentrations involving variable interest entities are subject to anti-monopoly scrutiny as well. In addition, PRC national security review rules which became effective in March 2011 require acquisitions by foreign investors of PRC companies engaged in military related or certain other industries that are crucial to national security be subject to security review before consummation of any such acquisition. The Measures for the Security Review of Foreign Investments promulgated by the NDRC and the Ministry of Commerce which became effective from January 2021 further requires that security review by competent governmental authorities is required to be conducted in accordance with the provisions of it for foreign investments that affect or may affect national security. We may pursue potential strategic acquisitions that are complementary to our business and operations. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future.

SAFE Circular 37 requires registration with, and approval from, Chinese government authorities in connection with direct or indirect control of an offshore entity by PRC residents. The term “control” under SAFE Circular 37 is broadly defined as the operation rights, beneficiary rights or decision-making rights acquired by PRC residents in the offshore special purpose vehicles by means of acquisition, trust, proxy, voting rights, repurchase, convertible bonds or other arrangements. In addition, any PRC resident who is a direct or indirect shareholder of a special purpose vehicle, or SPV, is required to update his or her filed registration with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contributions into its subsidiary in China. On February 13, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct

 

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Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE or its local branch in connection with their establishment of an SPV. The qualified banks will directly examine the applications and accept registrations under the supervision of SAFE.

These regulations may have a significant impact on our present and future structuring and investment. We have requested our shareholders who to our knowledge are PRC residents to make the necessary applications, filings and amendments as required under these regulations. We intend to take all necessary measures to ensure that all required applications and filings will be duly made and all other requirements will be met. We further intend to structure and execute our future offshore acquisitions in a manner consistent with these regulations and any other relevant legislation. However, because it is presently uncertain how the SAFE regulations, and any future legislation concerning offshore or cross-border transactions, will be interpreted and implemented by the government authorities in connection with our future offshore financings or acquisitions, we cannot provide any assurances that we will be able to comply with, qualify under, or obtain any approvals required by the regulations or other legislation. Furthermore, we cannot assure you that any PRC beneficial owners of our company or any PRC company into which we invest will be able to comply with those requirements. As of the date of this prospectus, Mr. Xiaohua Chen, our founder and chairman, has completed the process of making the initial registration, and Mr. Jinbo Yao is in the process of updating his registration with SAFE as required by SAFE Circular 37. Any failure or inability by such individuals to comply with SAFE regulations may subject us to fines or legal sanctions, such as restrictions on our cross-border investment activities or our PRC subsidiaries’ ability to distribute dividends to, or obtain foreign exchange-denominated loans from, our company or prevent us from making distributions or paying dividends. As a result, our business operations and our ability to make distributions to you could be materially and adversely affected.

Furthermore, as these foreign exchange regulations are still relatively new and their interpretation and implementation has been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border transactions, will be interpreted, amended and implemented by the government authorities. For example, we may be subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

In February 2012, SAFE promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, replacing the Implementation Rules of the Administrative Measures for Individual Foreign Exchange promulgated in 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE or its local branches through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options will be subject to these regulations when our company becomes an overseas-listed company upon the completion of this offering. Failure to complete the SAFE

 

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registrations may subject them to fines and legal sanctions, there may be additional restrictions on the ability of them to exercise their stock options or remit proceeds gained from sale of their stock into the PRC. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC laws. See “Regulation—Regulations Related to Stock Incentive Plans.”

If we are classified as a PRC resident enterprise for PRC enterprise income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders and ADS holders.

Under the PRC EIT Law, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China, and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

We believe our company is not a PRC resident enterprise for PRC tax purposes. We are not controlled by a PRC enterprise or PRC enterprise group and we do not meet all of the conditions above. We are a company incorporated outside China. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that our company is a PRC resident enterprise for enterprise income tax purposes, we will be subject to PRC enterprise income on our worldwide income at the rate of 25%. Furthermore, we will be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or ordinary shares, if such gain is treated as derived from a PRC source. Furthermore, if we are deemed a PRC resident enterprise, dividends paid to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source by us). These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders of our company would, in practice, be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or ordinary shares.

We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

On February 3, 2015, the State Administration of Taxation issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Bulletin 7, as amended in 2017. SAT Bulletin 7 extends its tax jurisdiction to transactions involving the transfer

 

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of taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Bulletin 7 has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Bulletin 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets.

On October 17, 2017, the State Administration of Taxation issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Bulletin 37, which came into effect on December 1, 2017. SAT Bulletin 37 further clarifies the practice and procedure of the withholding of non-resident enterprise income tax.

Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or taxed if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under SAT Bulletin 7 and/or SAT Bulletin 37. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be requested to assist in the filing under SAT Bulletin 7 and/or SAT Bulletin 37. As a result, we may be required to expend valuable resources to comply with SAT Bulletin 7 and/or SAT Bulletin 37 or to request the transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.

Discontinuation of any of government subsidies could adversely affect our financial condition and results of operations.

Our PRC subsidiaries have received various subsidies from local governments. The subsidiaries are provided based on discretionary incentives and policies adopted by the local government authorities. The discontinuation of such financial subsidies or imposition of any additional taxes could adversely affect our financial condition and results of operations.

The audit report included in this prospectus is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, our investors are deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit report included elsewhere in this prospectus filed with the U.S. Securities and Exchange Commission, or the SEC, as auditors of companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by

 

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the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects a heightened interest in this issue that U.S. regulators have focused on in recent years. However, it remains unclear whether the SEC and PCAOB will take any further actions to address the issue.

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

On June 4, 2020, the U.S. President issued a memorandum ordering the President’s Working Group on Financial Markets, or the PWG, to submit a report to the President within 60 days of the memorandum that includes recommendations for actions that can be taken by the executive branch and by the SEC or PCAOB to further protect investors in Chinese companies listed in the United States in response to the PCAOB’s lack of access to the work of such companies’ auditors. In August 2020, the PWG, released the Report on Protecting United States Investors from Significant Risks from Chinese Companies, which outlined the PWG’s five recommendations to the SEC. In particular, the PWG recommends that the SEC work to enhance U.S. exchanges’ listing standards to address the concern over the PCAOB’s lack of access to audit work papers. This would require, as a condition to initial and continued exchange listing, PCAOB access to work papers of the principal audit firm for the audit of the listed company. The PWG proposed a concept under which companies that are unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in non-cooperating jurisdictions, or NCJs, may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm. However, there is currently no legal framework where such a co-audit could be conducted in China. To reduce market disruption, the new listing standards could provide for a transition period until January 1, 2022 for currently listed companies. The report also recommends to require enhanced and prominent issuer disclosures of the risks of investing in NCJs such as China. After this transition period, if currently listed companies were unable to meet the enhanced listing standards, then they would become subject to securities exchange rules and processes that could lead to possible de-listing if not cured. The measures in the PWG report are presumably subject to the standard SEC rulemaking process before becoming effective. On August 10, 2020, the SEC announced that then-SEC Chairman Jay Clayton had directed the SEC staff to prepare proposals in response to the PWG report, and that the SEC was soliciting public comments and information with respect to these proposals.

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, former U.S. President Donald J. Trump signed into law on December 18, 2020 the Holding Foreign Companies Accountable Act, or the HFCA Act, which requires the SEC to propose rules within 90 days after its enactment to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded “over the counter” if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for three consecutive years after the law becomes effective. On March 24, 2021, the SEC adopted interim final amendments to implement the HFCA Act. On June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two. We could be delisted if we are unable to cure the situation to meet the PCAOB inspection requirement in time. See “—We could be delisted if we are unable to meet the PCAOB inspection requirements in time.”

 

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We could be delisted if we are unable to meet the PCAOB inspection requirements in time.

On December 18, 2020, the HFCA Act was enacted. The HFCA Act requires the SEC to prohibit securities of any foreign companies from being listed on U.S. securities exchanges or traded “over-the-counter” if a company retains a foreign accounting firm that cannot be inspected by the PCAOB for three consecutive years, beginning in 2021. A registrant will not be required to comply with the amendments until the SEC has identified it as having a non-inspection year. As of the date of this prospectus, the SEC is seeking public comment on this identification process. Our independent registered public accounting firm is located in and organized under the laws of the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, and therefore our auditors are currently not inspected by the PCAOB. We are not required to comply with the SEC’s interim final amendments to implement the HFCA Act until the SEC has identified us as having a “non-inspection” year under a process to be subsequently established by the SEC. If we are identified by the SEC as a registrant that will have to comply with the interim final amendments, we will be subject to additional submission and disclosure requirements. For example, the amendments will require any identified registrant to submit documentation to the SEC establishing that the registrant is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in a foreign issuer’s annual report regarding the audit arrangements of, and governmental influence on, such a registrant. The SEC is seeking public comment on these submission and disclosure requirements and plans to separately address implementation of the trading prohibitions in the HFCA Act in the future.

There could be additional regulations or legislation that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States, or the PWG Report. The PWG Report contained recommendations to address the lack of PCAOB inspection access. Some of these recommendations were implemented in the HFCA Act. However, some of the recommendations were more stringent than the HFCA Act. For example, the PWG report recommended that the transition period before a company would be delisted would end on January 1, 2022.

Whether the PCAOB will be able to conduct inspections of our auditors in the next three years, or at all, is subject to substantial uncertainty and depends on a number of factors out of our control. If we are unable to meet the PCAOB inspection requirement in time, we could be subject to additional submission and disclosure requirements, delisted and our ADSs will not be permitted for trading “over-the-counter” either. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the ongoing risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, such a delisting would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition and prospects.

Proceedings instituted by the SEC against Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In December 2012, the SEC instituted administrative proceedings against the “big four” China-based accounting firms, including our independent registered public accounting firm, alleging that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ audit work papers with respect to certain China-based companies that are publicly traded in the United States.

On January 22, 2014, the administrative law judge presiding over the matter rendered an initial decision that each of the firms had violated the SEC’s rules of practice by failing to produce audit papers and other documents to the SEC. The initial decision censured each of the firms and barred them from practicing before the SEC for a period of six months.

 

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On February 6, 2015, the four China-based accounting firms each agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC and audit U.S.-listed companies. The settlement required the firms to follow detailed procedures and to seek to provide the SEC with access to Chinese firms’ audit documents via the China Securities Regulatory Commission, or the CSRC. Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019. While we cannot predict if the SEC will further challenge the four China-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions, if the accounting firms are subject to additional remedial measures, our ability to file our financial statements in compliance with SEC requirements could be impacted. A determination that we have not timely filed financial statements in compliance with the SEC requirements could ultimately lead to the delisting of our ordinary shares from the New York Stock Exchange or the termination of the registration of our ordinary shares under the Securities Exchange Act of 1934, or both, which would substantially reduce or effectively terminate the trading of our ordinary shares in the United States.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in China, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, and could result in delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our shares may be adversely affected. If our independent registered public accounting firm was denied, temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined to not be in compliance with the requirements of the Exchange Act.

Risks Relating to the ADSs and This Offering

We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies, including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

An active trading market for our ordinary shares or the ADSs may not develop and the trading price for our ADSs may fluctuate significantly.

We have been approved to list the ADSs on the New York Stock Exchange. We have no current intention to seek a listing for our ordinary shares on any stock exchange. Prior to the completion of this offering, there has been no public market for the ADSs or our ordinary shares, and we cannot assure you that a liquid public market for the ADSs will develop. If an active public market for the ADSs does not develop following the completion of this offering, the market price and liquidity of the ADSs may be materially and adversely affected. The initial public offering price for our ADSs was determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of the ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

 

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The trading price of the ADSs is likely to be volatile, which could result in substantial losses to investors.

The trading price of the ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for the ADSs may be highly volatile for factors specific to our own operations, including the following:

 

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variations in our net revenues, earnings and cash flows;

 

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announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;

 

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announcements of new offerings, solutions and expansions by us or our competitors;

 

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changes in financial estimates by securities analysts;

 

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detrimental adverse publicity about us, our services or our industry;

 

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announcements of new regulations, rules or policies relevant to our business;

 

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additions or departures of key personnel;

 

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our controlling shareholder’s business performance and reputation;

 

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release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

 

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potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

Because our initial public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately US$            per ADS, representing the difference between the initial public offering price of US$            per ADS, the midpoint of the estimated public offering price range shown on the front cover of this prospectus, and our net tangible book value per ADS as of March 31, 2021, after giving effect to the net proceeds to us from this offering. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon the completion of this offering.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.

The trading market for the ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade the ADSs, the market price for the

 

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ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for the ADSs to decline.

The sale or availability for sale of substantial amounts of ADSs could adversely affect their market price.

Sales of substantial amounts of the ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of the ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lockup agreements. There will be                 ADSs (representing                 ordinary shares) issued and outstanding immediately after this offering, or                    ADSs (representing                 ordinary shares) if the underwriters exercise their option to purchase additional ADSs in full. [In connection with this offering, we[, our directors, executive officers, existing shareholders and certain holders of our share-based awards] have agreed, subject to certain exceptions, not to sell any ordinary shares or ADSs for 180 days after the date of this prospectus without the prior written consent of the representatives of the underwriters.] However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of the ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

Techniques employed by short sellers may drive down the market price of the ADSs.

Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the market.

Public companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny and negative publicity has centered on allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.

It is not clear what effect such negative publicity could have on us. If we were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such allegations and/or defend ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed against the short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract our management from growing our business. Even if such allegations are ultimately proven to be groundless, allegations against us could severely impact our business operations, and any investment in the ADSs could be greatly reduced or even rendered worthless.

 

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Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on a price appreciation of the ADSs for a return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in the ADSs as a source for any future dividend income.

Our Board of Directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our Board of Directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our Board of Directors. Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in the ADSs.

The approval of the China Securities Regulatory Commission may be required in connection with this offering under PRC laws.

The M&A Rules purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear. If CSRC approval is required, it is uncertain whether it would be possible for us to obtain the approval, and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.

Tian Yuan Law Firm, our PRC legal counsel, has advised us that, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval of this offering and the listing and trading of our ADSs on the New York Stock Exchange because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation, (ii) we established the WFOE by means of direct investment and not through a merger or acquisition of the equity or assets of a “PRC domestic company” as such term is defined under the M&A Rules, and (iii) no provision in the M&A Rules classifies the contractual arrangements under the VIE Agreements as a type of acquisition transaction falling under the M&A Rules.

However, our PRC legal counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering, and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that the competent PRC government agencies, including the CSRC, would reach the same conclusion as our PRC legal counsel, and hence we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the ADSs. The CSRC or other PRC

 

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regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of the ADSs.

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Act (As Revised) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England and Wales, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands have a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. In addition, while under Delaware law, controlling shareholders owe fiduciary duties to the companies they control and their minority shareholders, under Cayman Islands law, our controlling shareholders do not owe any such fiduciary duties to our company or to our minority shareholders.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than the memorandum and articles of association, our register of mortgages and charges and special resolutions of our shareholders) or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association that will become effective immediately prior to completion of this offering to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as the United States. If we choose to follow home country practice, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Act of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

 

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Certain judgments obtained against us by our shareholders may not be enforceable.

We are an exempted company limited by shares incorporated under the laws of the Cayman Islands and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.” However, the deposit agreement gives you the right to submit claims against us to binding arbitration, and arbitration awards may be enforceable against us and our assets in China even when court judgments are not.

Our amended and restated articles of association to be in effect immediately prior to the completion of this offering and the deposit agreement designate the federal district courts of the United States or the courts in Cayman Islands as the exclusive forum for certain litigation that may be initiated by the holders of our ordinary shares, the ADSs or other securities, which could limit their ability to obtain a favorable judicial forum for disputes with us.

Our post-offering amended and restated articles of association provide that unless we consent in writing to the selection of an alternative forum, to the fullest extent permitted by relevant law, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act or the Exchange Act, regardless of whether such legal suit, action, or proceeding also involves parties other than our Company. The deposit agreement provides that the federal district courts of the United States shall have exclusive jurisdiction over any suit, action or proceeding against or involving us or the depositary, arising out of or relating in any way to the deposit agreement or the transactions contemplated thereby or by virtue of owning the ADSs. Our post-offering amended and restated articles of association further provide that unless we consent in writing to the selection of an alternative forum, the courts of the Cayman Islands shall have exclusive jurisdiction to hear, settle and/or determine any dispute, controversy or claim (including any non-contractual dispute, controversy or claim) whether arising out of or in connection with our memorandum and articles of association or otherwise, including any questions regarding their existence, validity, formation or termination. The Cayman exclusive forum provision does not apply to claims or causes of action brought to enforce a duty or liability created by the Securities Act or the Exchange Act, or any other claim based on federal securities laws of the United States for which claim the federal district courts of the United States have exclusive jurisdiction. In addition, our post-offering memorandum and articles of association provide that any person or entity purchasing or otherwise acquiring our shares or other securities in us, or purchasing or otherwise acquiring ADSs issued pursuant to the deposit agreement, is deemed to have notice of and consented to the Cayman forum provision and the Federal forum provision. Notwithstanding the above, holders of our ordinary shares, the ADSs or other securities cannot and will not be deemed to have waived our compliance with the U.S. federal securities laws and the rules and regulations thereunder.

We recognize that exclusive forum selection clauses in our post-offering memorandum and articles of association or the deposit agreement may impose additional litigation costs on holders of our ordinary shares, the ADSs or other securities in pursuing their claims, particularly if the holders do not reside in or near the Cayman Islands or the United States. Additionally, the forum selection clauses in our post-offering memorandum and articles of association or the deposit agreement may limit the holders’ ability to bring a claim in a judicial forum that they find favorable for disputes with us or our directors, officers or employees, which may discourage the filing of lawsuits against us and our directors, officers and employees, even though an action, if successful, might benefit holders of our securities. In addition, while the Delaware Supreme Court ruled in March 2020 that federal forum selection provisions purporting to require claims under the Securities Act be brought in federal court were

 

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“facially valid” under Delaware law and the California Supreme Court made a similar ruling under the California law, there is uncertainty as to whether other courts will enforce our exclusive forum selection clauses. If our exclusive forum selection clauses are found to be unenforceable, we may incur additional costs associated with resolving such matters. The exclusive forum selection clauses may also impose additional litigation costs on holders of our securities who assert that the provisions are not enforceable or invalid.

ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement or relating to our ordinary shares or the ADSs, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our ordinary shares provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial for any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.

If we or the depositary were to oppose a jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based on the facts and circumstances of the case in accordance with applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, or by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this would be the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have, including outcomes that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or the ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct the voting of the underlying ordinary shares represented by your ADSs.

As an exempted company incorporated in the Cayman Islands, we are not obliged by the Companies Act (As Revised) to call shareholders’ annual general meetings. Our post-offering memorandum and articles of association provide that we may (but are not obliged to) each year hold a general meeting as our annual general meeting. Holders of ADSs do not have the same rights as our shareholders. As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which attach to underlying the ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the

 

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deposit agreement. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying ordinary shares represented by your ADSs in accordance with those instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise any right to vote with respect to the underlying ordinary shares represented by your ADSs unless you withdraw such ordinary shares and become the registered holder of such ordinary shares prior to the record date for the general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to enable you to withdraw such underlying ordinary shares represented by your ADSs and become the registered holder of such ordinary shares prior to the record date for the general meeting to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our amended and restated articles of association that will become effective immediately prior to completion of this offering, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the underlying ordinary shares represented by your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. We cannot assure you that you will receive the voting material in time to ensure you can direct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the underlying ordinary shares represented by your ADSs are voted and you may have no legal remedy if the underlying ordinary shares represented by your ADSs are not voted as you requested. The depositary for our ADSs may give us a discretionary proxy to vote the ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests.

The depositary for the ADSs may give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings if:

 

•

we have informed the depositary that we wish a discretionary proxy to be given;

 

•

we have informed the depositary that there is no substantial opposition as to a matter to be voted on at the meeting; and

 

•

a matter to be voted on at the meeting would not have a material adverse impact on shareholders.

The effect of this discretionary proxy is that if you do not vote at shareholders’ meetings, you cannot prevent our ordinary shares underlying your ADSs from being voted. This may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

You may experience dilution of your holdings due to the inability to participate in rights offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. However, we cannot make such rights available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the

 

58

provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of the ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

You may be subject to limitations on the transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems it expedient in connection with the performance of its duties. The depositary may close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, imposes various requirements on the corporate governance practices of public companies. We qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected not to “opt out” of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time private companies adopt the new or revised standard.

Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs and has made and will continue to make some corporate activities more time-consuming and costlier. When we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the other rules and regulations of the SEC. In addition, we have incurred additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We expect these rules and regulations to increase our legal and financial compliance costs, but we cannot predict or estimate the additional costs we may incur or the timing of such costs.

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

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We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.

Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:

 

•

the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;

 

•

the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

 

•

the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

•

the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the New York Stock Exchange. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.

As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NYSE corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with such corporate governance listing standards.

As a Cayman Islands exempted company listed on the New York Stock Exchange, we are subject to New York Stock Exchange’s corporate governance listing standards. However, New York Stock Exchange’s rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the New York Stock Exchange’s corporate governance listing standards. For example, Cayman Islands does not require us to comply with the following corporate governance listing standards of the New York Stock Exchange: (i) having the majority of our board of directors composed of independent directors, (ii) having a minimum of three members in our audit committee, (iii) holding annual shareholders’ meetings, (iv) having a compensation committee composed entirely of independent directors, and (v) having a nominating and corporate governance committee composed entirely of independent directors. To the extent that we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would enjoy under New York Stock Exchange’s corporate governance listing standards applicable to U.S. domestic issuers.

If we are classified as a passive foreign investment company for U.S. federal income tax purposes for any taxable year, U.S. Holders of the ADSs or ordinary shares could be subject to adverse U.S. federal income tax consequences.

We will be a “passive foreign investment company,” or “PFIC,” if, in any particular taxable year, either (a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the average quarterly value of our assets (as determined on the basis of fair market value) during such year produce or are held for the production of passive income (the “asset test”). Although the law in this regard is unclear, we intend to treat our VIEs (including their subsidiaries) as being owned by us for U.S. federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because

 

60

we are entitled to substantially all of its economic benefits, and, as a result, we consolidate its results of operations in our U.S. GAAP financial statements. Assuming that we are the owner of our VIEs (including their subsidiaries) for U.S. federal income tax purposes, and based upon our current and expected income and assets, including goodwill, (taking into account the expected proceeds from this offering) and projections as to the market price of our ADSs following the offering, we do not presently expect to be a PFIC for the current taxable year.

While we do not expect to be a PFIC in the current taxable year, because the value of our assets for purposes of the asset test may be determined by reference to the market price of our ADSs, fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in part, on the composition of our income and assets, which may be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. If we determine not to deploy significant amounts of cash for active purposes or if it were determined that we do not own the stock of our VIEs for U.S. federal income tax purposes, our risk of being a PFIC may substantially increase. Because there are uncertainties in the application of the rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

If we are a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation—United States Federal Income Taxation”) may incur significantly increased U.S. income tax on gain recognized on the sale or other disposition of the ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an “excess distribution” under the U.S. federal income tax rules and such holder may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which such U.S. holder holds our ADSs or ordinary shares. For more information see “Taxation—United States Federal Income Taxation—Passive Foreign Investment Company Considerations.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of current or historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements about:

 

•

our mission and strategies;

 

•

our future business development, financial condition and results of operations;

 

•

expected changes in our revenues, costs or expenditures;

 

•

our expectations regarding demand for and market acceptance of our services;

 

•

the impact of the COVID-19 pandemic on the global economy, our customers, employees and business;

 

•

our ability to manage our growth and expansion into new lines of business;

 

•

competition in our industry;

 

•

government policies and regulations relating to our industry;

 

•

general economic and business conditions globally and in China; and

 

•

assumptions underlying or related to any of the foregoing.

You should read this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

This prospectus also contains statistical data and estimates that we obtained from industry publications and reports generated by third-party providers of market intelligence, including the size, growth rates and other data relating to the home services market in China. Although we have not independently verified the data, we believe that the publications and reports are reliable. The market data contained in this prospectus involves a number of assumptions, estimates and limitations. The home services industry in China and its components may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. You should not place undue reliance on these forward-looking statements.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$             million, or approximately US$             million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. These estimates are based upon an assumed initial offering price of US$             per ADS, the midpoint of the range shown on the front cover page of this prospectus. A US$1.00 change in the assumed initial public offering price of US$             per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease the net proceeds of this offering by US$             million, or approximately US$             million if the underwriters exercise their option to purchase additional ADSs in full, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.

The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives, and obtain additional capital. We intend to use the proceeds from this offering for the following purposes:

 

•

approximately 40% of the net proceeds to diversify our service offerings and expand our operations;

 

•

approximately 25% of the net proceeds to promote our brand and service recognition;

 

•

approximately 20% of the net proceeds to upgrade our technology systems and continue to develop our home services infrastructure; and

 

•

the rest of the net proceeds for working capital and general corporate purposes, including strategic investments and acquisitions, although we have not identified any specific investments or acquisition opportunities at this time.

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant discretion and flexibility to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.

In using the proceeds of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our PRC subsidiaries only through loans or capital contributions and to our variable interest entities only through loans, subject to satisfaction of applicable government registration and approval requirements. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Relating to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries and to make loans to our VIEs, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

63

DIVIDEND POLICY

Our board of directors has discretion on whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. Even if we decide to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Regulation—Regulations Related to Foreign Exchange” and “Risk Factors—Risks Relating to Doing Business in China—Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.”

If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the ordinary shares underlying our ADSs to the depositary, as the registered holder of such ordinary shares, and the depositary then will pay such amounts to our ADS holders in proportion to the ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2021:

 

•

on an actual basis;

 

•

on a pro forma basis to reflect (i) the issuance of 15,737,450 Series C preferred shares for an aggregate consideration of RMB300,000,000 (equivalent to US$46,254,182) in the form of convertible loans to us; (ii) the issuance of 3,925,661 Series B preferred shares with total proceeds of US$10,000,000 in April 2021; (iii) the conversion of the convertible loans and warrants held by certain Series A financing investors into 26,102,780 Series A preferred shares in April and May 2021; (iv) the issuances of 13,779,658 Series C preferred shares with total proceeds of US$40,500,000 in June 2021; (v) share-based compensation expenses associated with immediate vesting of 12,347,265 options that have satisfied the service condition upon the completion of this offering; and (vi) the automatic conversion of all of preferred shares outstanding as of the date of this prospectus into 123,006,156 ordinary shares on a one-for-one basis immediately prior to the completion of this offering; and

 

•

on a pro forma as adjusted basis to reflect (i) the issuance of 15,737,450 Series C preferred shares for an aggregate consideration of RMB300,000,000 (equivalent to US$46,254,182) in the form of convertible loans to us; (ii) the issuance of 3,925,661 Series B preferred shares with total proceeds of US$10,000,000 in April 2021; (iii) the conversion of the convertible loans and warrants held by certain Series A financing investors into 26,102,780 Series A preferred shares in April and May 2021; (iv) the issuances of 13,779,658 Series C preferred shares with total proceeds of US$40,500,000 in June 2021; (v) share-based compensation expenses associated with immediate vesting of 12,347,265 options that have satisfied the service condition upon the completion of this offering; (vi) the automatic conversion of all of preferred shares outstanding as of the date of this prospectus on a one-for-one basis into 123,006,156 ordinary shares immediately prior to the completion of this offering; and (vii) the sale of              ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$              per ADS, the midpoint of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise over-allotment option.

 

65

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

		As of March 31, 2021
		Actual								Pro forma								Pro forma as adjusted(1)
		RMB				US$				RMB				US$				RMB				US$
		(in thousands)
Convertible loans			483,837				73,848
Mezzanine equity:
Series A convertible redeemable preferred shares (US$ 0.0000025 par value; 24,204,000 shares authorized, issued and outstanding)			440,468				67,229
Series B convertible redeemable preferred shares (US$0.0000025 par value; 39,256,607 shares authorized, issued and outstanding)			756,187				115,417
Total mezzanine equity			1,196,655				182,646
Shareholders’ deficit:
Ordinary shares (US$0.0000025 par value, 19,550,000,000 shares authorized, 404,813,458 shares issued and outstanding)			6				1
Additional paid-in capital			1,079,846				164,817
Subscription receivables			—				—
Accumulated deficit			(3,287,301	)			(501,740	)
Accumulated other comprehensive loss			(21,317	)			(3,254	)
Daojia Limited shareholders’ deficit			(2,228,766	)			(340,176	)
Noncontrolling interests			29,768				4,544
Total shareholders’ deficit(2)			(2,198,998	)			(335,632	)
Total convertible loans, mezzanine equity and shareholders’ deficit			(518,506	)			(79,138	)

 

(1)

The pro forma as adjusted information discussed above is illustrative only. Our additional paid-in capital, accumulated deficit, accumulated other comprehensive income, total shareholders’ deficit and total capitalization following the completion of this offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing.

(2)

A US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price shown on the cover page of this prospectus, would increase (decrease) each of additional paid-in capital, total shareholders’ deficit and total capitalization by US$             million, assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares and holders of our preferred shares which will automatically convert into our ordinary shares immediately prior to the completion of this offering.

Our net tangible book value as of March 31, 2021, was approximately US$             per ordinary share and US$             per ADS. Net tangible book value per ordinary share represents the amount of total tangible assets, minus the amount of total liabilities, divided by the total number of ordinary shares outstanding. Pro forma net tangible book value per ordinary share is calculated after giving effect to the automatic conversion of all of our outstanding preferred shares. Dilution is determined by subtracting pro forma net tangible book value per ordinary share from the assumed public offering price per ordinary share.

Without taking into account any other changes in such net tangible book value after March 31, 2021, other than to give effect to our issuance and sale of              ADSs in this offering at an assumed initial public offering price of US$             per ADS, the midpoint of the estimated public offering price range, and after deduction of underwriting discounts and commissions and estimated offering expenses payable by us (assuming the over-allotment option is not exercised), our pro forma as adjusted net tangible book value as of March 31, 2021, would have been US$             per ordinary share, including ordinary shares underlying our outstanding ADSs, or US$             per ADS. This represents an immediate increase in net tangible book value of US$             per ordinary share, or US$             per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$             per ordinary share, or US$             per ADS, to purchasers of ADSs in this offering. The following table illustrates such dilution:

 

		Per Ordinary Share				Per ADS
Assumed initial public offering price		US$				US$
Net tangible book value as of March 31, 2021		US$				US$
Pro forma net tangible book value after giving effect to the automatic conversion of all of our outstanding preferred shares and              of Class B ordinary shares, as of March 31, 2021		US$				US$
Pro forma as adjusted net tangible book value after giving effect to the automatic conversion of all of our outstanding preferred shares and              of Class B ordinary shares and this offering, as of March 31, 2021		US$				US$
Amount of dilution in net tangible book value to new investors in this offering		US$				US$

The following table summarizes, on a pro forma basis as of March 31, 2021, the differences between our existing shareholders as of March 31, 2021, and the new investors with respect to the number of ordinary shares purchased from us, the total consideration paid and the average price per ordinary share paid at an assumed initial public offering price of US$             per ADS before deducting estimated underwriting discounts and commissions and estimated offering expenses.

 

Ordinary shares purchased

Total consideration

Average price per ordinary share

Average price per ADS

Number

Percent

Amount

Percent

Existing shareholders

%

US$

%

US$

US$

New investors

%

US$

%

US$

US$

Total

100

%

US$

100

%

 

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