Tech

Chinese Netflix-style service iQiyi tanks by 18% after U.S. regulators investigate fraud allegations

Key Points
  • iQiyi announced that the Securities and Exchange Commission (SEC) has launched a probe into the company.
  • The SEC investigation was prompted by a report from Wolfpack Research in April in which it accused iQiyi of fraud and inflating revenue and user numbers.
  • iQiyi shares plunged over 12% in after-hours trade. 
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SEC opens probe into iQiyi over fraud allegations

Shares of Chinese streaming service iQiyi plunged in after-hours trade in the U.S. after it announced the Securities and Exchange Commission (SEC) has launched a probe into the company.

The SEC investigation was prompted by a report in April from Wolfpack Research, which describes itself as an "activist research and due-diligence firm." In that report, Wolfpack accused iQiyi of fraud and inflating its numbers. 

iQiyi said the SEC is "seeking the production of certain financial and operating records dating from January 1, 2018, as well as documents related to certain acquisitions and investments that were identified in a report issued by short-seller firm Wolfpack Research in April 2020."

The Netflix-style streaming giant also said it has "engaged professional advisers to conduct an internal review into certain of the key allegations" in Wolfpack's report.

Wolfpack Research alleged  iQiyi inflated its 2019 revenue by approximately 8 billion yuan ($1.13 billion) to 13 billion yuan ($1.98 billion) — or between 27% to 44%. Wolfpack also claimed the streaming company overstated user numbers and expenses. 

Shares of Nasdaq-listed iQiyi fell over 18% in extended trade but pared some of those losses. The company was down 12.36% at the end of the after-hours trade period. 

Yu Gong (center), founder and CEO of China-based iQiyi (IQ), rings the Opening Bell at Nasdaq MarketSite in Times Square with employees and investors in celebration of its initial public offering (IPO) on March 29, 2018 in New York City.
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The SEC probe into iQiyi comes amid rising scrutiny on U.S.-listed Chinese companies following the Luckin Coffee scandal earlier this year. 

China's Luckin Coffee admitted to fabricating sales numbers for 2019. The company was subsequently delisted from the Nasdaq in June

In May, the U.S. senate passed a bill that would increase auditing scrutiny on Chinese firms listed on Wall Street, with the threat of delisting if they don't comply. 

In 2018, iQiyi was spun off from Chinese search giant Baidu in a U.S. IPO that raised over $2.2 billion. Baidu, which is also listed in the U.S., has a majority stake in iQiyi. As Baidu faced increased competition in China — in key products like search and advertising — iQiyi became an important part of its growth prospects.

In the second quarter, iQiyi membership revenue grew 19% year-over-year, while online advertising revenue declining 28% year-over-year, according to Baidu's earnings report

Baidu shares were down 7% in extended hours trade on Thursday as a result of the SEC probe into iQiyi.