Summary of Key Points
Xiaohongshu, a popular unicorn aiming for an IPO on the Hong Kong stock market, has recently attracted attention from the capital markets due to two controversial incidents:
1. The former employee's options case (an employee who met performance criteria was dismissed before the options became exercisable; the company attempted to shift responsibility by separating domestic and overseas entities, but the court determined a substantial connection and ordered compensation).
2. A large number of users have experienced "permanent account bans" without any specific reasons or evidence, and appeals were unsuccessful.
These incidents reveal a common issue in Xiaohongshu's governance culture: the use of regulatory barriers and opaque mechanisms to exploit vulnerable individuals (employees and users). The company's VIE (Variable Interest Entity) structure and lack of transparency in user management could pose compliance risks during its IPO process and challenge the ESG (Environment, Social, Governance) criteria set by the Hong Kong Stock Exchange.
Detailed Analysis
1. Options Case: The "Two Faces" of the VIE Structure
Xiaohongshu adopted a common "red chip VIE structure" for its Hong Kong listing, which involves an overseas entity (e.g., Xingin International) and a domestic operating entity that signs contracts with employees. This structure allows the overseas entity to control the domestic one, enabling the consolidation of domestic performance into the overseas financial reports.
In the case of former employee Chen Hao, however, the company claimed in court that the domestic and overseas entities were independent legal persons and thus not liable for compensation. This contradicts the company's claims in its prospectus, which states that the overseas entity controls the domestic one. The court saw through this deception and ruled that the companies were substantially connected, ordering the company to compensate Chen Hao for his losses.
The key issue here is that a company presents different narratives to the judiciary and regulators, raising doubts about its integrity. Investors must be concerned about potential compliance risks after the listing, as the company will be accountable to global shareholders.
2. User Bans: Arbitrary andOpaque Operations
Many users have reported being permanently banned from their Xiaohongshu accounts without any clear reasons or evidence, with automated responses from the platform when they attempt to appeal.
From a legal perspective:
- Accounts represent users' virtual assets (such as content and follower relationships), and unilateral bans by the platform constitute a breach of contract and a violation of the Civil Code's principles of fairness.
- The use of automated decision-making without explanation also violates the Personal Information Protection Law, which requires transparency when such decisions affect individual rights.
By shifting compliance costs to users, the platform essentially denies them any recourse.
3. A Common Governance Culture: Exploiting Vulnerable Parties
These issues reflect a consistent pattern of using regulatory barriers to oppress both internal (employees) and external (users) stakeholders:
- For employees, the complex VIE structure makes it difficult to seek redress; the company delays or prevents legal action.
- For users, vague rules and opaque practices leave them with no recourse.
Xiaohongshu's behavior goes against the responsibilities expected of a public company.
4. IPO Compliance Challenges
The Hong Kong Stock Exchange has strict ESG requirements, particularly in the areas of social responsibility and corporate governance.
- The arbitrary bans violate social responsibility by treating users unfairly.
- The internal conflicts and lack of contractual transparency in the options case highlight governance deficiencies.
If Xiaohongshu cannot address these issues, the exchange may issue inquiries or even delay the listing process. Even if the company succeeds, such issues could negatively impact its stock price due to potential legal actions or regulatory penalties.
5. Advice for Investors and Users
- Investors: Don't rely solely on metrics like monthly active users or revenue growth; assess the company's governance culture. A company that mistreats its employees and users is unlikely to build long-term trust, which can significantly increase investment risks.
- Users: If banned without reason, don't waste time appealing internally; seek legal help by:
- Collecting evidence (screenhots of account information, chat records showing the platform's refusal to provide reasons).
- Contacting relevant authorities (cyber governance departments, industry regulators, or consumer protection organizations).
- Demanding a clear explanation of the violation and evidence as per legal rights.
Conclusion
No matter how high Xiaohongshu's valuation is, it cannot rely on regulatory barriers and opaque practices to protect itself. Listing requires transparency and compliance with public standards. Failing to address governance issues could result in significant consequences, as trust is the most valuable asset for any company.