Pinduoduo's Early Failure in NASDAQ

 By Wang Ziyi, China IP

It is easy for enterprises to be listed on NASDAQ, but they might spend a lot later. We here appeal to enterprises to go to the capital marker after they know more about laws especially on intellectual property and capital market.

On July 26, 2018, Pinduoduo's shares soared by 39.45% on its trading debut in NASDAQ, reached 26.5 USD per share, and its market value was 34 billion dollars. From September in 2015 when it went online to the date when it was listed on NASDAQ, Pinduodu spends only 2 years and 11 months and grows up like a rocket, breaks the record of China's internet enterprises who are listed early.

However, within less than one week after listing, Pinduoduo encountered a series of blows due to the problem of intellectual property. At first, many enterprises and famous brand sellers denounced Pinduoduo, said that it sold many forgeries.

Pinduoduo as a new listing enterprise faced the crisis of integrity. At the beginning of August, State Administration of Market Regulation held an executive interview, requesting Pinduoduo to strengthen management and review of operators and products in its platform, and actively cooperated with all-level market regulation departments in all regions for investigation and examination. In the next few days, Pinduoduo's shares slumped to its issue price in 5 days after listing.

Its market value decreased by about ten billion dollars so that many law firms in USA initiated legal proceedings to safeguard their legal rights, denouncing that Pinduoduo's management was incompetent to combat forgeries and made investors encounter a great loss.

Innovative business modes shall observe basic laws

Pinduoduo's prospectus highlights that high performance-price business as well as interesting and interactive shopping experience is its key of growth, and defines it as a new and innovative social e-commerce.

Pinduoduo focuses on consumption demotion through recommending products by persons, finally realizes viral dissemination with interpersonal relationship, know more persons through grouping so as to realize the goal of secondary dissemination. Within less than 3 years, Pinduoduo owns 0.3 billion low-level users, so its innovative mode is very attractive. Along with the development of internet, new type e-commerce enterprises are more and more pursed by capital and supported by governments, but while e-commerce enterprises develop rapidly, many illegal activities emerge accordingly such as manufacturing and selling counterfeit and fake goods, brand infringement, unreal propaganda and illegal advertisement including free-riding against the well-known brand. In an interview with a journalist from China IP, Zang Baoqing, Deputy Secretary-General of China Trademark Association, said, "many forgeries in Pinduoduo are products that infringe trademark.

Its habitual practice is highlighting those infringed trademarks so as to confuse consumers." If so, as a third party sales company, can Pinduoduo have constraint mechanisms in advance for these infringed products? In fact, from China's relevant laws, administration regulations, judicial interpretation and some guidance advice of Supreme People's Court, this constraint apparently exists.

Article 23 in Administrative Measures for Online Trading promulgated by State Administration for Industry and Commerce of the People's Republic of China stipulate that the third party operators shall examine and register the operation principal identity of juristic persons, other economic organizations or individual proprietors that apply for selling products or providing services in platforms, and build registration records and regularly check and update them." The online operators, as mentioned aboce, do take the obligation of supervision and examination for relevant products or services. Zang Baoqing said, "platforms can control and prevent some infringement acts.

Key words such as Grade-A products or imitation goods involved in the product information, it is an infringement of trademark. Through screening and examining key words, some infringed products are easily to be found and removed from platforms. Or if some product prices are apparently and unreasonably low, sellers shall also find the problems of intellectual property." Pinduoduo's experience reminds us of Alibaba three years ago. In January 2015, State Administration for Industry and Commerce of the People's Republic of China issued Online Trading Product Directed Monitoring Results in the Latter Half of 2014. It showed that Taobao's rate of authentic products was the lowest among many investigated platforms, which was 37.25%. Alibaba's shares slumped and its market value rapidly shrank. In February, 2015, Alibaba encountered a collective lawsuit from many American law firms because Alibaba concealed key risks during IPO, failed to fully disclose the influence of counterfeit trading and report facts so as to mislead investors. In an interview with a journalist from China IP, Dong Xinyi, Director of Technological and Financial Law Research Center in Central University of Finance and Economics, said, "Pinduoduo is listed in a short time, so its management might have problems such as insufficient guarantee for brand, quality and consumers' rights and interests. Compared with Taobao's experience, Pinduoduo may also have pains for a long time during growth." Meanwhile, Dong Xinyi also says that China's consumers have a very tolerant attitude towards forgeries.

If products are forgeries instead of fake and shoddy goods without harm to human body, they would rather not to protect their legal rights in most cases. Especially in undeveloped towns, consumers are satisfied with technological products at a low price. Therefore, online trading platforms shall conscientiously take their own social responsibility during development, strengthen management for online stores, observe laws and keep self-disciplined, comply with regulations to operate, strive to safeguard legal rights and interests of consumers and operators, avoid illegal operation such as infringed forgeries.

Listing on NASDAQ shall be based on enterprise development 

The applicable laws of American security collective lawsuit are Securities Act of 1933 and Securities Exchange Act of 1934.

Securities Exchange Act of 1934, which stipulate that listing enterprises in USA shall make sufficient and just information disclosure. When publicly issuing shares for the first time, enterprises must truly, correctly and completely disclose important information (including issuers' property, business and management, etc.) in their prospectus according to Securities Act of 1933, avoid false record, misleading statements or key omission. After listing, enterprises shall constantly disclose important information according to the requirements in Securities Exchange Act in 1934, and avoid misleading statements, false disclosure or concealment and nondisclosure. As regards whether some information is important and it shall be disclosed, the U.S. Securities and Exchange Commission defines that it shall be reasonably known to all before ordinary common people buy and register securities.

If rational investors believe that this information is really important and it will affect their investment decision, this information is important.

According to the official information issued by the Rosen Law Firm which is reported to claim to initiate the lawsuit, the collective lawsuit is initiated because Pinduoduo is suspected of issuing apparently misleading commercial information to investors, so its shares slump after listing and investors' interests are damaged.

US adopts a registration system which is different from China's listing system. Security issuers disclose all information about security issuance, formulate legal documents, and submit them to competent authorities for examination. Competent authorities merely review whether the information provided by issue appliers perform the system of information disclosure obligation. Issuers' operation nature, financial capability, quality and development prospect, issuance quantity and price are not considered as elements for review.

Competent authorities merely make formal examination. Instead, China adopts a review and approval system.

When issuing shares, issuers not only sufficiently disclose true information of enterprises, but also comply with necessary conditions required by relevant laws and security regulation organizations. Competent authorities shall review whether issuers comply with issuance conditions. Compared with China and US, the registration system adopted by US seems simple.

However, it has strict requirements on the reality, accuracy, completeness and timeliness of all information in submitted documents. If some false information causes damage to investors, security issuers may face a collective lawsuit.

US capital market is always admired by global investors, and many innovative technological enterprises in China dream of being listed on NASDAQ. It is easy for enterprises to be listed on NASDAQ, but they might spend a lot later.

For China's enterprises who intend to be listed in American market or developed countries' capital market, Dong Xinyi proposes the following suggestions. Firstly, fully know laws and regulations on listing in these countries, avoid illegal acts such as cheating investors.

Secondly, all management practices shall be prepared before and after listing, avoid false statements, insider dealing and market manipulation, etc. Thirdly, when enterprises prepare listing and have gone listing, they shall insist in safeguarding interests of consumers and investors.

"For enterprise operators, they may not contravene some basic rules. Enterprises shall prioritize protecting intellectual property."Zang Baoqing said, "relevant consumers can protect their rights and interests through complaints or lawsuits. Here, I appeal to China's enterprises to know more about laws, and go to capital market after knowing laws about intellectual property and capital market."

（Translated by Dong Mingming)