Investor sues Chinese e-cigarette maker RLX for allegedly distorting risks

An investor has filed a lawsuit against RLX Technology Inc.,

claiming that the Chinese vaping company overestimated its financial data and distorted potential regulatory risks when it filed the documents for its US IPO

The lawsuit, filed on Wednesday by shareholder Alex Garnett in U.S. District Court for the Southern District of New York City, alleges that RLX’s registration statement from last October overlooked the impact of ongoing efforts by Chinese regulators to tighten sales of electronic cigarettes.

Companies subject to rules established by the United States Securities and Exchange Commission must disclose any known event or uncertainty that, at the time of an IPO, caused or was likely not to represent future profits.

Mr Garnett’s lawsuit, which he has filed on behalf of other RLX investors, comes amid heightened scrutiny of Chinese companies trading on US stock exchanges over concerns about the accuracy of their financial statements. Among these was the coffee chain Luckin Coffee Inc.,

which last year was delisted from the Nasdaq Stock Market after revealing that some employees had made hundreds of millions of dollars in sales.

RLX did not immediately respond to a request for comment.

Beijing-based RLX, which was founded in 2018, went public on the New York Stock Exchange in January. The offer raised $ 1.39 billion and was one of the largest IPOs in the first quarter, according to data provider Dealogic Ltd. Its share price has fallen sharply since, in part due to potential regulatory changes in China. RLX shares were trading at $ 9.15 on Thursday, down about 69% since its inception.

In 2019, Chinese regulators called on companies and markets to stop selling e-cigarettes online, in a bid to curb underage vaping. Regulators then proposed rules in March 2021 that would designate these cigarettes as tobacco products, raising scrutiny from the companies that sell them.

Although RLX sells vaping products in China, private company RELX International distributes them overseas.

The lawsuit alleges investors bought RLX shares at artificially inflated prices, in part because the company omitted and misrepresented information in the registration statement. As the stock price fell, investors in RLX lost hundreds of millions of dollars, according to the lawsuit. Mr. Garnett bought 300 shares at a price of $ 27.87, according to a filing. Mr. Garnett did not immediately respond to a request for comment.

At least two other law firms, Labaton Sucharow LLP and Schall Law Firm, have said in recent weeks that they are investigating on behalf of investors to determine whether RLX has not disclosed relevant information to investors. Rosen Law Firm PA and Bronstein, Gewirtz & Grossman LLC, among others, said Thursday they are looking for RLX investors who want to join a class action lawsuit.

RLX reported on June 2 sales of 2.4 billion Chinese yuan, equivalent to $ 366.1 million, for the quarter ended March 31, compared to 368.6 million yuan the previous year. The company recorded a net loss of 267 million yuan, or 40.8 million yuan, compared to a profit of 12.1 million yuan in the quarter of the previous year.

The company’s financial statements over the past few months have raised questions from accountants. Among the problems is RLX’s unusually high ratio of cash and securities to total assets, according to Jacek Welc, assistant professor of corporate finance and accounting at the Polish University of Economics and Business in Wroclaw. . Cash and financial assets represented 86% of the company’s total assets for the nine-month period ended September 30, Welc said. This percentage is higher than those of five international companies accused of accounting fraud in cash since 2008, according to Mr. Welc, including the German Wirecard AG.

“The amount of money on hand is pretty impressive,” said Erik Gerding, a professor of law at the University of Colorado, who reviewed RLX’s prospectus. “Even outside of financial fraud, the question arises as to where they are going to invest this money and why they would not give it to shareholders.”

Write to Mark Maurer at [email protected]

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