Can you believe that this stock of cryptocurrencies has been listed on the Nasdaq?

In November, Chinese manufacturer of bitcoin mining machines Canaan Creative become the first crypto company to be listed on Nasdaq, with a valuation of $ 1.35 billion.

After the Bitmain IPO, another Chinese bitcoin mining company trying to go public since 2018, Canaan's successful listing on a large U.S. stock exchange has been heralded by the crypto industry as a sort of coup. This is despite the fact that the $ 90 million the company raised is only a fraction of its original goal of $ 400 million. See for example this tweet by Justin Sun (the guy Warren Buffett was recently invited to dinner with after offering just over $ 4.5 million for the privilege):

The party, however, seems to have been a bit premature.

In the three months that have passed since listing, the Cayman Islands registered company – which is one of the world's largest manufacturers of ASIC devices used to "operate" cryptocurrency – saw its share price plummet by almost half, from $ 9 to around $ 4.70 at pixel time (despite an unusual day's increase in 80% in the middle of last month). And it was in a period when bitcoin climbed about 15%.

But the collapse of the stock price is just the beginning of the company's woes.

Be by our side as we tell you a strange story about how this little-known Chinese crypto company came to the listing of the world's second largest stock exchange, despite three failed attempts at listing in Asia, and is now being sued by disgruntled investors.

Wednesday, an investor in Canaan named Phillippe Lemieux filed a class action against the company, alleging that it had published false and misleading statements to make its financial health better than it was, and had not disclosed information that might have been relevant for investors. And a host of law firms have announced surveys in similar allegations of securities law violations by Canaan in the past two weeks.

All of this comes from the back of a February 20 note from a short seller Marcus Aurelius value (MAV), titled "Canaan Fodder", which gives some rather disturbing details about the antics of the company as it approaches the Nasdaq registration, as well as its previous three unsuccessful attempts.

Canaan told us that they were unable to provide comment for this article as it was too close to their release of the fourth quarter results. Instead, they directed us to an article on the Chinese blockchain-based site huiyep.com, which is a series of rebuttals to the brief MAV report. It's in Mandarin, but we used Google to give us an awkward translation, and will include some of it in an attempt to get Canaan's point across in this post.

From the MAV note (with our accent):

We consider CAN to be the last Chinese company listed in the United States to have misled investors about its activities. After having failed to list on Asian stock markets three times since 2016, CAN took advantage of these sparkling markets to complete a NASDAQ IPO in November 2019. Stocks jumped more than 80% in just one trading day. last week, pushing the company's market capitalization above $ 1 billion, which appears to have drawn thousands of unsuspecting retail investors into speculative fervor. But our investigation into this manufacturer of bitcoin mining machines reveals undisclosed related party transactions, irregularities involving numerous customers and distributors, as well as a business model that we consider broken. Whatever your vision for the future of Bitcoin, we think CAN's activities are simply far worse than promoted. We therefore see a significant downside potential and believe that the stock is not investable.

Let us therefore examine some of these allegations.

The first concerns alleged undisclosed transactions between related parties. End of October, about three weeks before registering for Nasdaq, Canaan ad a "strategic partnership" with a small company listed on Cayman Island and listed in Hong Kong called Grandshores, the latter agreeing to spend up to $ 150 million to buy and distribute Canaan equipment on behalf of the company by the end of 2020.

That $ 150 million is almost equal to Canaan's tracking revenue over about 12 months, or $ 177 million, as MAV points out, which therefore seems to be a big problem for the company. But it’s also more than three more time than Grandshores' market capitalization, four times 2019 income declared, and nearly ten times the cash amount the Hong Kong company says it has on hand. So how could Granshores afford to spend the $ 150 million? What was happening?

It turns out that Grandshores' president and chief executive officer, Yao Yongjie, is a shareholder of Canaan and holds 9.7% of the company's outstanding shares according to a SEC file. But this transaction is not listed in documents filed by the SEC, so the relationship is not recognized. MAV says it regards Grandshores' announcement as "largely untrue" and that it "has been used by CAN as a tool to get its financial prospects across to investors."

We received no response to our request for comment on this from Grandshores, but Huiyep's article says that the relationship did not need to be disclosed as it "did not meet not the related party standards required by US financial accounting standards. ” It also states that the $ 150 million deal "was only an intention, not a pending or completed transaction, and had no impact on the bottom line." ; exploitation during the reporting period "and therefore there was no need to disclose it. (However, Grandshores felt the need to disclose it as a related related party, its deposits in Hong Kong.)

Similar related related transactions appear to have been used to stimulate investor interest in light of Canaan's attempts to list on the Chinese stock exchanges.

You also have the fact that some of the companies listed as Canaan's main customers in its Chinese registration documents seem to operate in industries that are absolutely not related to crypto mining.

According to MAV, one of the top five debtors listed by Canaan from 2015 to 2017 was a company called Tianjin Garments Import & Export Co. The clue is in the name: the company says on his website that she specializes in "clothing, fabrics, blankets, carpets and stone carvings".

Huiyep's article says (excuse the awkward translation) that Canaan "borrowed (Tianjin) import and export skills to export a mining machine to a Swedish customer. The initial payment was always the deposit from Tianjin Clothing. "

Hmm.

Then there are the distributors who disappear. Shortly before its IPO, Canaan removed 8 of the 11 official distributors it previously listed on its website (MAV links May 2019 version of the site as archived by the return machine). One of them was a company called Nova Bit Mining Solutions, which at least appears to be in encryption.

The intriguing thing here, however, is that the CEO of Nova Bit, according to his LinkedIn profile, is Andres Romero, and he is … one of Canaan's sales representatives. he luckily lists the two companies on his LinkedIn profile:

We contacted Romero about it, and he told us that he was no longer working for Nova Bit and that he simply hadn't updated his LinkedIn profile yet. He also said that he had "no idea" of the identity of the new CEO of Nova Bit or whether the business was still operational. Like MAV, we called the number listed on the Nova Bit website several times and we were unsuccessful.

It also appears that there have been other problems with the distributors. MAV says their review of the seven other distributors that were removed reveals that "most appear to be small, missing or otherwise unable to purchase large quantities of CAN products."

The other company Romero is currently working on on his LinkedIn is Northern Data, which last week ad "close cooperation" with Canaan "in the areas of artificial intelligence (AI) development, Blockchain technology and data center operations". Canaan’s other registered sales agent, Matthew Carson, works for the same company, according to his LinkedIn profile. Cryptoland: everything is so comfortable.

Another somewhat bizarre question, given the fees associated with such transactions, is that shortly before Canaan's listing on the Nasdaq on November 20, its main Credit Suisse underwriters took of of the IPO. We asked Credit Suisse to explain the reason for the sudden change of heart, but the bank declined to comment.

There is much more to dig here, and the short, comprehensive report – which has elicited no direct response from society – is worth reading.

We will certainly continue to closely monitor this endeavor. With so much smoke, there must be Canaan fire.