Fraud Uncovered
In February 2021, Cloopen Group Holding Ltd., a Chinese cloud services provider, floated its IPO on the New York Stock Exchange, securing $320 million and fostering high expectations for China’s cloud services market.
However, the company’s fortunes took a dramatic downturn when it revealed fake sales of up to 30 million yuan ($4.2 million) in May 2022, leading to a Securities and Exchange Commission (SEC) probe into falsifying revenue.
Settlement with SEC
Cloopen’s recent settlement with the SEC marks an attempt to reposition itself. The agreement notably lacks monetary penalties, owing to the company’s full cooperation with the investigation. The SEC acknowledged Cloopen’s self-reporting of accounting issues, extensive cooperation, and prompt remedial measures.
However, the ultimate impact of this settlement on Cloopen’s future re-listing on major exchanges remains uncertain, pending investor confidence in the company.
Road to Rebuilding
Cloopen, like other Chinese companies implicated in financial irregularities, now faces the immense challenge of restoring its standing. The company initiated significant board changes in December, reflecting a determination to correct past missteps and instill new corporate governance practices. Nonetheless, its former top management, including CEO Sun Changxun, still remain within the company despite stepping down from the board.
Aside from internal reform, Cloopen’s path to reemergence is impeded by stiff competition in the cloud services market and China’s decelerating economy.
Implications of the Settlement
Cloopen’s fraud exposure follows a broader trend in the U.S.-listed Chinese companies, with other cases such as Luckin and Dada Nexus also admitting to financial improprieties. Notably, these fraudulent activities were unearthed through internal audits rather than SEC-initiated probes—reflecting a significant change in the SEC’s ability to access Chinese companies’ internal books through a new information-sharing deal with Chinese regulatory authorities.
These developments indicate an improving reliability of financial reports from U.S.-listed Chinese companies, assuring foreign investors. Whether Cloopen and its counterparts can ultimately return to major exchanges will depend on their ability to reestablish trust and transparency.