BlueCity Holdings Ltd offers social internet services to diverse users around the world. Their portfolio includes the apps Blued, Bluedbaby, Danlan Public Interest, He Health, and other products across China, Korea, India, Vietnam, and Thailand. BlueCity became the world’s largest LGBTQ-focused online community in 2019. I found out they attained this height of recognition based on their average number of monthly active users (MAUs). They had up to six million MAUs in just the first quarter of 2020. BlueCity backed up this great feat by making an initial public offering (IPO) on July 8, 2020. There, they were able to raise additional $85 million of funding from the IPO.
Before becoming publicly traded, the company must ascertain how big the market is for generating revenues. This desire for a new status would necessitate the company to consider how disruptive its services are or can be. In addition, the company can start looking into competitive advantages and business models that will help sustain its profit-making progression. The above criteria are important because a straight line does not often represent the market line graph.
If a company cannot outperform the inconsistency of the market, such an IPO may suffer extinction. Hence, the company must be growing at a steady rate before it can consider an IPO. Not only must there be steady growth, but the future earnings must also be predictable. In the case of BlueCity, I believe their early 2020 achievement qualified them for an IPO based on these criteria. With all these things being in place, an IPO document has to be drawn to outline the company’s financial details.
This document is referred to as the prospectus for an IPO. This document is where the company is expected to lay its objective and tell present potential investors with the info they need to trade their stock. The company and its investment bankers are expected to warn investors of imminent risks that could crumble the price of their shares after purchasing their stock. Other general details of the company must be well spelled out as well.
The details written in the prospectus would include details on how the company is planning to use the IPO proceeds, list members of the management team, and how these executives are paid. The prospectus is what investors base their investment strategy upon. Now, some of the investors are claiming that BlueCity’s IPO document overstated the company’s business prospects.
The class-action suit is entirely based on BlueCity’s Registration Statement or IPO prospectus. On July 19, 2021, several law firms representing BlueCity’s leading IPO stock investors filed a class-action lawsuit. The filling was made with the Eastern District of New York. In the case statement, it was said by the plaintiff that BlueCity, its executives, and underwriters of its IPO violated the Security Acts of 1933.
So far, there have been four allegations against the said Registration Statement. It has been alleged that the company overstated business and financial prospects. Secondly, BlueCity was said to be ill-equipped to absorb the costs of being a publicly traded company. Thirdly, the allegation was that BlueCity’s capability for sustainable growth had been misrepresented. And finally, the Registration Statement was suspected to be materially false or misleading because it did not state the information it ought to.
If the plaintiffs can have all these allegations proven true, it would be detrimental for any company, even BlueCity, because every investor can hold the prospectus against the company. After all, an IPO investor finances the enhancement of the company’s services and consequently benefits from the rise in the company’s market value. Since the initial decision to invest into the company was made under false pretences, then I believe the company has to bear the losses. Hence, companies that have suffered significant losses based on the estimation provided by BlueCity have the right to push for a settlement from the company. Given the 20% stock dip which has impacted investors, its strong position in the market (before the IPO and) promoted in the prospectus is not being replicated.
After three weeks of proceedings on the lawsuit, BlueCity Holdings Ltd is yet to release an official statement to address the investors’ concerns. With reputable Law firms such as Rosen Law Firm and Glancy Prongay & Murray LLP being involved, I can only see this class action continuing. Investors with significant losses have been given until September 17, 2021, to apply to the court so they can be appointed as the lead plaintiff in the lawsuit.
BlueCity has attained the height of giving a media voice to the LGBTQ community. I want to firmly state that the effectiveness of giving a community their much-deserved voice must be matched by providing an adequate evaluation of the company’s future. Unfortunately, BlueCity did not behave in a reputable way in this matter, and is now at the receiving end of possibly the largest ever class-action lawsuit against a Chinese company.