6 Min Read
(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.