Some of the most outrageous initial public offerings from around the world are actually underwritten by an obscure brokerage based in Red Bank, New Jersey, according to an article in Bloomberg. Network 1 Financial Securities underwrote half a dozen US microcap IPOs that wound up surging 2,190% on average in their first trading day. That performance is more than 250 times the offerings from Goldman Sachs, JPMorgan Chase, and Morgan Stanley.
But Network 1’s listings are anything but a steady bet for investors; their average offering plummeted 75% within a month of its peak this year. The firm, which was established in 1983, is well known for its volatile swings in NY IPOs which mainly come from companies in China. Addentax Group Corp, a Chinese garment manufacturer, is one such IPO; it surged to $656.54 on the day it debuted, outperforming a third of the S&P 500. That high was short-lived; the next day, it plunged to $30. It’s a trend that’s emerged since Chinese regulators have cracked down on new offerings from small stocks in their own country, allowing Network 1 to dominate this segment of the market.
Though Network 1 hasn’t been accused of wrongdoing with the IPOs, “investors should be least comfortable with…the lack of transparency in these stocks,” Ken Shih of Hong Kong-based Saxo Capital Markets told Bloomberg. And it’s been the target of regulators over the years, having paid hundreds of thousands of dollars in fines for disclosure failures, improper customer solicitation, and lacking policies to weed out insider trading. Network 1 has a specialized Mandarin-speaking team; since July 2015, 55% of its IPOs were based in either Hong Kong or China. The firm is well-known in China, particularly for its focus on small Chinese companies that don’t meet the listing requirements in the Chinese market. Many of their offerings have a low float and a great portion of the stake held by industry insiders, such as Shawn Huang Sanchun, CEO of Future Fintech Group, a blockchain-based e-commerce company and who is thought to be an indirect owner of Network 1, though his position isn’t publicized by Network 1, the article details.
Network 1 is not the only player in this part of the market, and the US remains a favorable option for small Chinese companies in spite of ongoing negotiations between the two countries to allow the US to examine audits of Chinese companies. Some analysts believe that the kind of deals Network 1 does will increase in anticipation of the opportunities disappearing altogether in the future. And the wild price swings aren’t unique to Network 1; another offering, AMTD Digital, whose IPO was underwritten by a related firm, soared 204% last week before dropping 31%. Amid such volatility, the SEC said last month that it has begun watching the unique shifts in microcap IPOs, though it did not name any specific firms that it is keeping an eye on. While their massive price spikes may be tempting, they’re “not sustainable,” Erik Gordon of the University of Michigan’s Ross School of Business said, telling Bloomberg that “These are scary stocks [that] professionals won’t get near[.]”
Network 1 did not respond to Bloomberg’s many requests for comment. According to Bloomberg data, 17 of the firm’s current offerings are trading at 80% or below their initial offer prices, while 7 are in the black.