RPT-IPO VIEW-Could Renren be vulnerable in a Chinese crackdown?

Sun May 8, 2011 5:35pm EDT

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 (Repeats item originally sent on Friday)
 * China increasingly concerned about "Jasmine Revolution"
 * Has banned certain searches, increased Web restrictions
 * Social networking company Renren faces govt oversight
 * Could be shut down for failure to comply -IPO prospectus
 By Clare Baldwin and Alina Selyukh
 NEW YORK, May 6 (Reuters) - Imagine buying shares in a
company that could be closed down overnight.
 That is in some ways what Renren (RENN.N), dubbed the
Facebook of China, asked investors to do.
 Last week, investors complied: Renren raised $743.4 million
in an initial public offering and its shares jumped 29 percent
on its first day of trading on the New York Stock Exchange.
 But Renren's operations, which include social networking,
gaming and online commerce, walk a thin line of compliance with
strict Chinese regulations around freedom of information -- and
if they cross the line, the consequences could be very severe.
 "People at any social network in China that is going to be
successful are going to be very sensitive to playing the game
by the rules," said Dixon Doll, co-founder and general partner
of venture capital firm DCM, which is an investor in Renren.
 "You're going to have to pay attention to the will of the
Chinese government because they are going to ... keep a very
close look on the kinds of activities that go on."
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 China's rules for sharing information online have become
stricter since authoritarian regimes across North Africa and
the Middle East have been toppled or challenged by protesters.
 The Communist Party leadership is determined to stamp out
even the hint of such protests immediately. It learned a harsh
lesson in 1989 when mass demonstrations threatened its control
and triggered a bloody military crackdown in Tiananmen Square.
 "They may regard (Renren) as a friendly enterprise, but if
an enterprise turns unfriendly, I think they would cut the
cord," said Donald Straszheim, senior managing director of
China research at International Strategy & Investment Group.
 China has already blocked social networking sites Twitter,
Flickr, Facebook and YouTube, while Google Inc (GOOG.O)
essentially pulled out of China in 2010 after run-ins with the
government over censorship and hacking.
 The government routinely shuts sites down or more commonly
blocks content it sees as a security risk -- and recently,
Chinese President Hu Jintao called for yet more oversight and
"mechanisms to guide online public opinion". [ID:nTOE71I00Q]
 But Beijing is also seeing social media as a valuable gauge
of public sentiment and a way to show the Chinese it is
sensitive to what they want, said Michal Meidan, a China
analyst at political risk consultancy Eurasia Group.
 In this peculiar environment, China-bred Internet ventures
have adapted, learning to navigate the system skillfully.
 In the case of a company like Renren that means blocking
whatever you are told to block by the authorities and also by
self censoring, which means reading the political winds so that
you block other material you fear could be controversial.
 "It's a constant game of cat and mouse," Meidan said.
 Renren itself acknowledges the tenuousness of its position
in the risk factors section of its IPO prospectus. While these
disclosures are notorious for listing the most extreme risks,
in this case they may well be worth a closer reading.
 The company says it is prohibited from allowing content
that, among other things, "impairs the national dignity of
China", is "superstitious" or "socially destabilizing".
 If Renren fails to comply, which would be determined by the
authorities, the company says its business could be shut down.
 For more serious, or "material" violations, the penalties
could include "a revocation of our operating licenses or a
suspension or shutdown of our online operations, which would
materially and adversely affect our business, results of
operations and reputation", Renren said.
 The social networking company said it is liable for all
material posted on its websites, from advertisements -- some of
which must be vetted by government officials before being
posted -- to individual communications between users.
 With that much responsibility, Renren said it may not
always know what content could cause problems and may only find
out about a violation after it has happened.
 Renren's structure also presents problems.
 For example, the fact that Renren is incorporated in the
Cayman Islands puts it in danger of being subject to new
limitations if foreign investment rules or their interpretation
change. Renren's online gaming operations, which provided 45
percent of the company's 2010 revenue, also could be affected
by Beijing's efforts to curb gaming addiction in minors.
 All told, Renren used variations of the word "uncertain"
nearly 70 times in its prospectus, and the word "regulation"
nearly 300 times. By comparison, U.S. Internet phone services
provider Skype used "uncertain" about 60 times in its
prospectus, but used "regulation" only about 170 times.
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