RENN: lawsuit special situation involving SoFi, Chamath, and SoftBank

Summary

RenRen (RENN) shareholders including famed activists Oasis (15% shareholder) are suing CEO Joe Chen for a predatory deal in 2017 that wrested a 15% stake in SoFi at a rock bottom valuation away from RENN. The trial was set to begin in December 2021, but with Chamath’s IPOE aiming to close the SPAC deal with SoFi in the next month, and Judge Borrock of NY suddenly entering a Show Cause order last week for Joe Chen to explain why he SHOULDN’T be barred from selling SoFi shares by May 14, the timeline has just been catalyzed significantly.

If Chen wants his SoFi board seat and to cash out on his shares, and if Chamath wants to close this SPAC deal on time, Chen is motivated to settle the suit before May 14. The lawsuit claims $500m in damages to be returned to RENN shareholders, which would triple RENN’s current market cap of $250m ($10 per share).

Like the previous NTP lawsuit special situation trade, not only is this a very simple outcome to model, it is also time bound. Most importantly, the risk/reward of current call options prices are astoundingly attractive. This is basically a big math question and the answer is:

I conservatively expect 130% risk-adjusted returns in 3 weeks, with potential for significantly more in the case of a decent settlement.

In the NTP trade where expected risk-adjusted return was 70%, the actual return was in excess of 800% when the lawsuit was won. Acash settlement is much more likely than with SoFi shares, but in the event of either, RENN shares would be worth $25+ (cash settlement) or $100+ (SoFi stock settlement) compared to the $10 right now. In addition, downside is limited for options by design, and even for equity, RenRen’s stake in their core business Kaixing (KXIN) is worth around $5.50 per share.

In summary, this is a very asymmetric yet timeboxed bet. Clock is ticking for Joe Chen and I like the odds of a quick settlement with limited downside protection from KXIN and options, with the 10x upside optionality of winning SoFi shares.

Sections:

1. Background
2. Catalysts
3. Valuation
4. Risks

I: Background

Here’s the summary:

1. Chen tried to steal SoFi in 2015, failed.
2. Chen strongarms a take-private deal in 2018 through OPI.
3. Everyone is pissed, and Oasis sues in 2018.
4. We got a trial in December 2021.

2011: RenRen flops

RenRen (NYSE:RENN) was intended to be a Chinese Facebook in the early 2010s that flopped upon arrival, but management kept the IPO funds and turned it into a used-car sales SaaS (Kaixin) in 2016 plus a decent VC. You’ve likely never heard of most of their PortCos (GoGo, Eall, Golden Axe, StoreDot, Motif, LendingHome, Eunke, Snowball, 268V, Omni, Hylink) EXCEPT for SoFi (25% stake). They could have just kept the show going with the SoFi golden goose and we’d be reading very different headlines about Joe Chen today, but nope, greed took over.

Absolutely heinous price chart don’t let your kids see this garbage

2015: Chen tries to take SoFi private but fails

In 2015, RENN CEO Joseph Chen (who is a US citizen and resides in the US — more on this later) tried and failed to offer a take-private deal of $1.4b for RENN assets. No pretext here, but I read this as “Chen saw the potential of SoFi and wanted the whole thing on the cheap”. For reference, SoFi raised at a $1b valuation just a month later further infuriating shareholders. This year, SoFi was valued at $8.65b at SPAC in January 2021, and IPOE (its SPAC vehicle) is currently trading at an implied $16b valuation.

Chen wanted SoFi gains to himself, at the expense of shareholders. Obviously shareholders did not accept; a large shareholder wrote to the board calling the offer “offensive and ludicrous” and “reflects the greed and almost immoral disposition of Chen and Liu”. Yikes.

2016–2018: Chen strongarms SoFi deal

Fast forward to 2016, Chen now tries hardball. In a *HIGHLY SUS* deal which the lawsuit today is trying to reverse, RENN sold off 44 of their holdings, including SoFi, to a vehicle called Oak Pacific Investment (OPI) and its subsidiaries. According to OPI’s offering circular, it’s book value was $530m on September 31, 2017 (57% of the book value was in US companies — more on this later). This was also according to RENN’s 2017 20-F, 93% (so basically all) of RENN’s $565m book value on December 31, 2017 (compare this to the $1.4b offer 2 years ago YIIIKES).

To come up with this $530m figure, Chen created a Special Committee, which consisted of 3 people: himself, his executive coach Stephen Tappin, and his friend and former RenRen CFO Pu Tianruo.

First of all, never trust anyone who puts CEO in their Twitter name

Thank you, Bill

Chen and his Special Committee also hired an “independent valuation advisor” Duff & Phelps, who concluded that OPI’s SoFi stake was worth between $483 million to $587 million — wow how convenient that it brackets Chen’s previous failed $500m offer for SoFi.

And what’s worse, D&P applied a 40–50% discount to the already low SoFi valuation because, according to the Offering Circular, “there is typically a discount” in “purchases and sales of large blocks in private companies and secondary sale transactions for private companies.”

Check out how D&P’s resulting “valuation” for SoFi compared to other historical valuations:

By the way, that SoftBank valuation of SoFi is what Chen himself used to secure a loan from SoftBank to fund the cash dividend for OPI that gave SoftBank any upside in SoFi through 3.5m shares. I mean C’MON basically he said OK Masayoshi our SoFi stake is worth $17.18 per share so can I borrow some cash to pay off the shareholders and you can get the upside on SoFi? Then immediately turned around to shareholders and said OK shareholders here is $9.17 for SoFi and 43 other companies, now STFU.

It’s honestly egregious — and this is just SoFi and implies that SoFi alone would have been worth more than the $530m sale to OPI. Forget about the other 43 PortCos. I’m gonna save some space, read about all the other D&P “valuations” on the lawsuit hosted here, page 62.

Further add to the mix that at the time, D&P itself was in talks to be acquired for $1.75b by Permira (a PE fund who may or may not have its own hand in this pot). Permira actually sold D&P last year for $4.2b so good on them, but ironic that this was a machine inside another bigger machine…

2018 June: Shareholders get eviscerated

Anyway, as a result of the OPI offering, RENN shareholders could either take a sh*tty special cash divvy (aka hush money) or participate in a PIPE for equivalent ownership in OPI EXCEPT OH WAIT only accredited investors can do PIPEs (aka no poor people allowed).

For what its worth, even accredited investors got screwed in the new vehicle. The Circular notes participating stockholders would “have no power to change the composition of the board of directors” and that Chen and Softbank could unilaterally “revise [OPI’s] articles of association” without any stockholder vote. In addition, shareholders of OPI would “experience immediate and substantial dilution” because OPI would issue over 136 million options and 6 million restricted shares to Chen and other insiders immediately after the Transaction”.

WTF.

In the end everyone got the pipe one way or another. For any aspirational robber barons reading this: if you’re trying to screw over poor people, just do that, don’t get greedy and try to screw over rich people too. Or just don’t do any of this, my god…

2018 July: Oasis sues RENN

In June 2018, the special cash divvy of ~$9 was paid out (aka forced the little guys to take paltry hush money), RENN stock price was eviscerated, and Chen walked away scot-free WRONG.

Enter our lord and savior, Oasis Capital Management (aptly named), an activist fund who has been specializing in Asian special situations since 2002, who filed a 5.3% stake in RENN in July 2018 AND this legendary lawsuit against RENN (revised 2021).

2020 May: Judge says there will be a trial

Chen and gang tried to argue that Oasis and gang couldn’t sue because this is a Chinese stock (with ADRs in the US). But remember that Chen is a US citizen who lives in the US, and 57% of companies sold to OPI were American. So in May 2020, New York Supreme Court Justice Andrew Borrok yelled on Zoom that New York indeed had jurisdiction over the defendants in this legal case and that the lawsuit could continue, and laid out this timeline:

Basically, by December 2021, a Note of Issue will be delivered aka the trial will begin.

Following this notice in June 2020, Oasis doubled its stake in RENN to 10%.

In September 2020, Oasis tripled its original stake to 15.2%.

NOW WE’RE COOKING WITH GAS FELLAS.

So let’s recap:

1. Chen tried to steal SoFi in 2015, failed.
2. Chen strongarms a take-private deal in 2018 through OPI.
3. Everyone is pissed, and Oasis sues in 2018.
4. We got a trial in December 2021.

Catalysts

Here’s what makes this situation especially saucy right now and potentially a very profitable trade.

1. In January 2021, SoFi SPACed with Chamath’s $IPOE and Chen is supposed to stay on the board (according to their website).
2. March 31: IPOE provided an amended S-4 that mentioned the Chen lawsuit for the first time, and that SoFi and SoftBank had also become defendants for transacting in legally “embezzled assets” so now it’s a visible sore to anyone interested in IPOE, and not just RENN.

3. On April 15, 2021 MVP Justice Andrew Borrok enters “Show Cause” order with deadline of May 14, 2021 for OPI to show proof and explain why Chen should NOT be barred from selling any more SoFi shares. WHEW LAD, would hate to be him right now.

4. On April 22, 2021 IPOE reported that they cleared up a warrant accounting issue and are waiting on SEC approval (usually takes 1–2 months).

In other words, Chen is very motivated to clean himself of this mess to stay on that SoFi board and not hold back the SPAC, which I think likely leads to a settlement before May 14, 2021. Aka time to trade some timeboxed options, NTP part 2 anyone?

In fact, Oasis and Chen had met in January 2021 to negotiate a settlement, but could not come to an agreement, so Chen had already expressed an interest then — he is definitely more motivated now given how the SoFi deal has progressed.

Furthermore, Chamath (opinions on him withheld) has some precedent with the SEC. After his Clover Health (CLOV, IPOC) S-4 was approved in October 2020, it was later revealed in February 2021 there was an ongoing DoJ investigation that was not disclosed (short seller hit job, Chamath dumped on bagholders, price tanked, we hate Chamath etc. etc.) so if the SEC has learned anything, it is to make sure SoFi’s S-4 is sparkling clean before approving it, meaning SoFi, SoftBank, Chamath, and Joe Chen better figure something out quick.

Valuation

Like the NTP trade, this is a pretty binary (or rather ternary) situation. Either:

1. Oasis wins in December and gets the SoFi shares
2. Chen settles with cash around late May
3. Oasis loses in December

There are some other scenarios in between but I think these are the three most likely. Given the situation, I think it is highly likely Chen settles to keep his SoFi board seat and not postpone the SPAC deal. Conveniently, both Judge Borrok and Chamath have timeboxed the trade for us. Chen and OPI have until May 14 to explain why he should not be prevented to sell his SoFi shares, AND based on the IPOE filing on April 22, IPOE should be targeting closing this deal in 1–2 months, which is also around late May.

Basically the ideal trade would take an asymmetric upside short term bet for a settlement in the May timeframe, and a long term bet for a lawsuit win in December.

I’ve done some scenario probabilities below to get an expected payout:

As you can see, winning the SoFi shares would be a homerun, but I think that’s unlikely, and it would also take until December… I’m much more interested in the short term bet on a settlement, which seems much more likely and also would drive a significantly higher IRR.

Do note that I have been extremely conservative in the bear win case, maybe to a fault. For the bear win case, I assumed IPOE price of $10 which is basically impossible and is the absolute floor for valuation. Also, the lawsuit calls for $500m in damages, which if you add to KXIN’s current market cap would imply ~$650m of value for RENN, which is closer to the base case. The bear case calls for an extremely paltry $80m cash settlement which is 15% of what the lawsuit claims AND is based on much lower 2017 book value of the OPI investments, not current market value. In addition, I modeled in a ~30% drop in KXIN in 3 weeks which is quite improbable as well. This just gives me confidence that $9 is the absolute floor for any scenario where any settlement is made.

The options contracts below are the most liquid and make the most sense for this trade, priced forward using Black-Scholes holding IV constant (usually IV spikes in event driven scenarios):

My weighing across these instruments lands a roughly 130% expected return in about 3 weeks.

Check out my NTP article for a deeper breakdown of the option pricing and probability analysis.

Even if you own equity, the downside is quite limited because remember RenRen’s “main business” if you can call it that, is Kaixin (KXIN) which is about $130m of market cap, so RENN is unlikely to go lower than its 87% stake in KXIN in the long term. Also, equities would marginally be a safer bet in the case that a settlement is paid out through dividend, because these illiquid options might not be priced efficiently to account for the dividend, unlike more liquid names.

Risks

There are a couple things to keep in mind:

1. First and foremost the biggest risk (apart from an obvious lose case) is that any settlement only goes to original RENN shareholders from before the OPI deal. This would be a logical and judicious outcome, but how would it get paid out? Chen forced to front the $500m? Pay with his SoFi/IPOE shares? Or maybe (hopefully) it’s just a load of cash or SoFi shares onto the current RENN balance sheet? I don’t know, but when there’s uncertainty (IV) there’s upside on options (and maybe equities), and my hope is at least the hype and eyeballs on IPOE would boost RENN a little through mid-May.
2. This is an event driven trade so the expected value really is quite meaningless since the result is binary. The number is just used for valuation. If there is a meaningful settlement you can bet RENN is going to be $20+. And if there is no settlement, well the options should become more or less worthless depending on which strike, but the equity could still be good for the December trial. Though I’d be looking to re-enter this trade closer to year end.
3. Price has already jumped 25% or so since last week after Judge Borrock entered the Show Cause order, so some folks are likely looking to take profits and optics/technicals aren’t fantastic. In fact, I suspect another firm CCVM who entered this trade around $2–3 was likely exiting in mid-March, which caused this bid wall around $10. The good news is someone is buying in size (hopefully Oasis) at $10, and I’m happy to be buying with Oasis. I’ve seen similar price movement in LVJI in October 2020 after a PIPE, where there was a bid wall that broke after the share transfer was complete, only to bottom out and then pop.

3. Equity liquidity is OK but options are pretty illiquid and the volume for the above-mentioned instruments are only a few hundred each, so if you’re moving size I’d suggest sticking with equities. My options are only about 30% of my equity net liquidating value and about 1.5x the notional delta.

Disclaimer: I am long RENN. No position in NTP, LVJI.

The above references my opinion and is for information purposes only. I am not being compensated by any company or persons mentioned in this article. The opinions stated here do not represent my employer’s opinions. All information used is publicly available and assumed to be factual. This is not intended to be investment advice. Investing in unregulated securities bears extremely high risk.