They may be set for one of the biggest IPOs investors have seen over recent years, but TikTok owners ByteDance have been forced to shelve their preparations for their initial public offering due to the choppy regulatory waters put in place within China.

ByteDance seemingly cemented its intentions by launching a recent share buyback for current and former employees. The buyback comes after the company announced in April that it had no imminent plans for a public listing.

This represents a full reversal after ByteDance had initially planned to list some of its Chinese businesses, including Douyin, a Chinese equivalent to leading social media app TikTok, in Hong Kong, according to Reuters.

To add further uncertainty to the immediate future of ByteDance, the company founder and CEO, Zhang Yiming surprised stakeholders by announcing that he’s stepping down from the company in the wake of increased state scrutiny over China’s leading tech firms.

As we can see from the chart above, ByteDance is one of the world’s leading companies when it comes to generating advertising revenue, attracting twice as much money as YouTube for ad sales over the span of 12 months.

In fact, ByteDance’s performance has become such a leader in the Asian tech landscape that the South China Morning Post estimated in April 2021 that the company was on course for a US$400 billion valuation.

However, in a recent company-wide email, ByteDance confirmed that eligible shareholders can apply to sell their holdings by the June 20 at US$126 per share for current employees and US$100.80 per share for former employees. This represents a significant increase on a November buyback that was US$60 a share.

The delay in going public will undoubtedly be cause for frustration with ByteDance as the global IPO market undergoes a boom period that’s been punctuated by widespread investor optimism- particularly for tech companies.

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Regulatory hurdles in the East and West

One of the biggest hurdles that ByteDance will need to overcome in order to revive its listing plans revolves around appeasing investors in both the US and China. According to reports, the company has failed to work out a way of restructuring its business operations in a way to meet the regulatory requirements of both the US and China.

Notably, the fact that TikTok and Douyin operate using the same algorithm means that it’s been difficult for ByteDance to separate the operations of both apps.

In the wake of ByteDance’s founder and CEO stepping down, one source told the South China Morning Post that “many people with different agendas are trying to have a say in the IPO plan.”

Because of ByteDance’s global outlook, the company’s ambitions to appeal to US investors has been difficult to make functional as the relationship between the US and China becomes increasingly strained.

Beyond the difficult relationship between the US and China, ByteDance may also be required to navigate the increasingly restrictive IPO rules that have recently been set out by China. In a recent bid to protect against stock market volatility, the country’s securities regulator announced draft rules in a bid to boost the transparency of its IPO listings.

As part of the IPO process in China, a sponsorship system has been developed where third parties act in a similar way to underwriters to assess risks, detail competitive advantages, profitability and business plans pertaining to firms looking to go public.

When a firm is accepted by a sponsor it’s thoroughly scrutinised and may even be restructured based on subsequent recommendations, however, the final decision as to whether the business is in a position to go public is still down to the securities regulator, known as the China Securities Regulatory Commission.

Some of the more restrictive requirements detailed in the draft include more in-depth interactions between sponsors and their clients, transparent financial reporting and the threat of shutdowns for uncooperative sponsors.

Capitalising on the IPO boom

It’s likely that ByteDance would have identified the current IPO climate as an ideal backdrop for its flotation.

With investor confidence growing after the pandemic, and social distancing measures making for an extremely profitable 12 months for tech-based companies, recent IPO listings have grown significantly.

As the data above shows, global IPO proceeds in Q1 of 2021 have dwarfed every other opening quarter for the past decade, paving the way for a record-breaking year for companies going public.

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According to Maxim Manturov, head of investment research at Freedom Finance Europe, the pandemic inadvertently brought far more confidence to the investment market. “People in the US traded about 90 per cent more stocks than the week before they received their stimulation funds,” Manturov explained.

“Finally, a survey by Deutsche Bank, which included 430 retail investors, showed that the respondents were going to invest, on average, 37 per cent of all their stimulation money into stocks. Goldman Sachs recently raised its expectations for stock demand by retail investors in 2021, from US$100 billion to US$350 billion.”

After such a successful year for apps like TikTok, and a resounding rise in the revenue generated through IPOs in early 2021, it seemed like an appropriate time for ByteDance to go public.

Although regulatory hurdles may have pushed an IPO out of the hands of the company, it’s still reasonable to believe that when the choppy waters are cleared and tensions between the US and China dissipate, we could still be on for a mammoth initial public offering.

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