Vietnamese e-commerce enabler Society Pass, which filed for a Nasdaq IPO earlier this month, looks poised to become the first tech startup from the country to list in the US.
However, convincing retail investors to buy into its story could be an uphill task, given the lawsuits being faced by the company and the association of its founder and CEO Dennis Nguyen with two discontinued businesses.
Society Pass was supposed to make its debut earlier this month, according to its listing prospectus filed with the US Securities and Exchange Commission on Oct. 4, but the IPO is now understood to be delayed.
The company planned to sell nearly 2.9 million shares on Nasdaq and had fixed a price range of $8-10 apiece for the share sale. Assuming an offer price of $9 — or the mid-point of the price range — the company will raise approximately $23.3 million, or nearly $27 million if the underwriters’ option to purchase additional shares is exercised in full, it said in its IPO prospectus.
Following the transaction, Society Pass expects that new investors will hold 13.83% of its outstanding shares. Meanwhile, 72.6% of the voting power will rest in the hands of Nguyen, making his firm a “controlled company” under Nasdaq norms.
In September 2021, the company issued 3,300 units of what it calls “Super Voting Preferred Stock” to Nguyen, along with 200 shares of the same to its chief financial officer (CFO) Raynauld Liang.
The “controlled company” status gives Society Pass exemptions from corporate governance rules — a majority of its board of directors can be independent directors; compensation of the CEO, i.e Nguyen, will be determined or recommended solely by independent directors; and director nominees will be selected or recommended solely by independent directors.
“As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements,” the company said in the prospectus.
Existing organisational shareholders who own over 5% of Society Pass’s common stock include Maroon Capital Limited, Gopher Limited, and Blue Jay Capital Limited, with voting powers of 3%, 2.9%, and 7%, respectively.
Since November 2018, the company has issued preferred stocks, in Series A through Series C-1 tranches, totalling $22.8 million, according to the document.
Litigations against Society Pass
Society Pass and Nguyen have been hit by lawsuits, including by ex-employees, the company acknowledged in its IPO prospectus. The former employees are claiming compensation and bonuses totalling nearly $690,000, as well as shares in Society Pass.
One of the aggrieved employees is understood to be Thomas O’Connor, co-founder of Society Pass. He had quit the company in 2019 and built GrowthHero, an AI-enabled SaaS startup based in Vietnam.
O’Connor declined to comment for this report.
On its part, Society Pass said it has made counterclaims for several millions of US dollars, citing the former employees’ breach of contract. The litigation is in the “discovery”, or pre-trial, stage.
In its prospectus, Society Pass also noted that a lawsuit has been filed against it in the US, in June, by early-stage VC firm SOSV.
SOSV is claiming damages in relation to a Vietnamese POS startup Hottab, which Society Pass acquired in 2019, along with e-commerce startup Leflair in June 2021, to build a loyalty platform for the e-commerce industry.
SOSV had agreed to invest in Hottab in early 2019 before Society Pass acquired it. The investor claimed that it is entitled to damages of $336,000 and a 5% equity in Hottab, as agreed between SOSV and Hottab prior to the acquisition.
Society Pass currently owns 100% of Hottab, per its prospectus. “The company denies the accusations of SOSV and intends to vigorously defend this matter,” it said.
SOSV had not replied to DealStreetAsia’s request for comment at the time of publication.
Separately, Society Pass is also facing a demand for arbitration in the US filed by a petitioner who claimed that he is owed $590,461 as of July 31, 2020, by the company.
According to the IPO prospectus, the petitioner had said there was an agreement with the company and its CEO to redeem certain common stock for a cash payment. “On May 21, 2021, the company agreed to settle the matter for a sum of $550,000. No additional shares were included in the settlement agreement,” the IPO prospectus read.
Nguyen’s past investments
Nguyen has served at two discontinued businesses in Vietnam in the past — he was the vice-chairman of restaurant operator Huy Vietnam Group, and the chairman at fusion food chain The KAfe.
He had invested in the two companies around 2013 through New Asia Partners, his investment firm which was terminated in 2017.
Huy Vietnam, which shut shop in 2019, has been embroiled in litigations with its private equity investors for nearly two years now.
In March this year, its Asia- and US-based investors — ADV Partners, Fortress Investments, F&H Fenghe, Gryphus Capital, Welkin Capital, and AIF Capital, among others — moved a US court accusing Huy Vietnam founder Huy Nhat and his affiliates of misappropriating $59 million.
The case was filed under Chapter 15 of the US Bankruptcy Code, which provides for cooperation between US courts and foreign courts when US financial interests are impacted by foreign bankruptcy proceedings.
In May 2020, DealStreetAsia reported that the PE investors had filed a lawsuit against Nhat in the Ho Chi Minh City court for allegedly misappropriating $25 million — a figure upwardly revised in the US filing.
DealStreetAsia had, in August 2020, run a detailed report on the accusations and lawsuits against Nhat in a series on corporate governance issues plaguing Vietnamese startups.
Huy Vietnam claimed to be the largest restaurant operator in Vietnam with over 70 stores across different brands. It had raised $30 million in two funding rounds, in 2014 and 2015, from external investors.
Before the lawsuits hit Huy Vietnam, Nguyen relinquished his position at the company. Consequently, he was not among the accused in the lawsuits, sources with knowledge of the matter told DealStreetAsia.
“No Vietnam-based fund invested in it [Huy Vietnam],” a source who knows some investors in Huy Vietnam said.
Separately, The KAfe, the other financially embattled firm associated with Nguyen, folded a year after Hong Kong-based Cassia Investments pumped in $5.5 million in a Series A round in 2015. The company quietly closed down its outlets as it was unable to scale in a competitive market.
“The Hong Kong investor [Cassia] was wiped out, they lost all the money they put in. I understand some investors would not bring disputes to the court because that would imply that they did poor due diligence,” said the source quoted above.
Cassia Investments did not respond to DealStreetAsia’s request for comment. The financial details of The KAfe and Huy Vietnam could not be ascertained as they are privately held companies.
Society Pass’s losses
At the group level, Society Pass posted a continuous loss of $4.2 million in H1 2021 and had an accumulated working capital deficit of $16.8 million as of June 30, 2021. Cash and cash equivalents in the period stood at $142,633, along with more than $64,000 in accounts receivable, deposits, prepayments, and other receivables, according to its IPO prospectus.
While the company is based in Vietnam, the Indonesia-based Aryaduta Hospitality & Leisure Group was its only large customer, accounting for 85.6% of Society Pass’ revenues in H1 2021.
US-based Maxim LLC acted as the underwriter for the IPO. The firm has not responded to DealStreetAsia for this article.
Society Pass financials
Source: IPO prospectus; The company said: “We generated revenues of $17,289 and $29,633 for the six months ended June 30, 2021, and 2020. The significant decrease is due to COVID-19 where merchants were unable to operate their business.”
“Even if Nasdaq does not require a company to be profitable to get listed, they [Society Pass] will have to provide some revenue uptake. I’m wondering how long that’s going to be,” said a person who was introduced to Nguyen for a possible business partnership, which did not materialise.
Separately, an executive who has worked with Nguyen at Society Pass told DealStreetAsia that the company has not focused on operations. “The company should be building products, but that didn’t happen,” he said.
Nguyen had not replied to DealStreetAsia’s request for comments at the time of publication.
Nguyen Van Loc, a lawyer and chairman at Vietnam-based law and consulting firm LP Group, noted that while failures among startups are unsurprising, there may be risks associated with founders’ past investments or business track record.
“While the legal mechanism still has loopholes to effectively govern such issues, when investors examine a new relationship, diligence on the compliance and business ethics of a founder will help to avoid investment risks,” he said.