Another disclosure dated 2020 stated “the firm failed to identify that a customer, a self-identified corporate insider of a microcap issuer, was actively trading the stock of his own company.” The firm was fined $60,000 and required to review its anti-money laundering program.
Its marketing materials say it has conducted private placements for the likes of Grab Holdings Ltd. and Space Exploration Technologies Corp. A spokesperson for Grab said it had not engaged the company for any transaction, though it was unaware if other parties may have engaged them to participate in investment rounds. Spacex didn’t reply to emails or phone calls to its public relations team seeking comment.
Of Network 1’s 49 deals for stocks that are still trading since 1995, 17 are trading 80% or more below their offer price, according to Bloomberg-compiled data. Seven are in positive territory.
China-US Connection
In recent years, the company has built up a specialist Chinese investment banking practice with a dedicated Mandarin-speaking team. At least 55% of the IPOs underwritten by Network 1 since July 2015 were of firms domiciled in either China or Hong Kong, or that had a majority of their operations in those countries, according to an analysis of transactions listed on Network 1’s website.
One banker at a large Chinese brokerage said Network 1 is well-known among China focused-funds for its focus on microcaps and is often present at industry events. A US-based banker for a separate big Chinese broker said Network 1 focused on smaller Chinese and Hong Kong companies that don’t meet listing requirements for their home markets. Both asked not to be identified talking about client matters.
This year four out of Network 1’s six listings -- the others were a SPAC and a Malaysian payment provider -- were either domiciled in Hong Kong or China or have their main revenue streams from China. These include school operator Golden Sun Education Group Ltd., lockset manufacturer Intelligent Living Application Group Inc. and financier Magic Empire Global Ltd.
All of these offerings had a low float and sometimes a large stake held by insiders. For instance, Magic Empire’s chairman and chief executive officer hold a combined 63% of its shares. None of the companies replied to emailed requests for comment.
Among Network 1’s apparent indirect owners is Shawn Huang Shanchun, the chief executive of a blockchain-based e-commerce company Future Fintech Group Inc. from China who identified himself as the executive vice-chairman of the US broker in a Chinese-language book he wrote. That position is not listed on Network 1’s website or in regulatory filings. According to the Finra filing, Huang holds undetermined stakes through the underwriter’s parent company.
As well as managing the Nasdaq-listed Future Fintech, Huang also owns a majority stake in Wealth Index (Beijing) International Investment Consulting Co., according to both Future Fintech’s announcement and the Chinese corporate database Tianyancha. The author of four books on capital markets, Huang is a graduate of news collection and editing, Future Fintech said at the time of his appointment.
A Xi’an, China-based public relations officer for Future Fintech declined to comment on its CEO’s behalf. There was no reply to a subsequent email to the company’s UK office.
‘Scary Stocks’
While Network 1 this year has brought more Chinese microcaps to the US market than any other broker, it’s not the only operator in this market segment.
Even though bigger Chinese deals in the US have evaporated as the two countries negotiate an agreement allowing American inspectors to examine audits of Chinese businesses, the US is still an attractive option for small companies. Unlike Hong Kong where approvals are required to go public, the US operates under a disclosure-based system, where there’s no permission needed.