China’s new data laws are a risk factor in a facial-recognition giant’s IPO filing

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China’s new data laws are a risk factor in a facial-recognition giant’s IPO filing
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SenseTime, one of the world’s most valuable artificial intelligence startups, backed by Japan’s SoftBank and Chinese e-commerce giant Alibaba, filed for a listing with the Hong Kong Stock Exchange on Friday (Aug. 27).

Founded in Hong Kong in 2014 by professor Tang Xiao’ou, SenseTime sells software platforms that drive automation, analyze data, and power devices. It is most widely known for its products involving facial recognition and autonomous driving, among others. The company didn’t disclose the size of the flotation, but Reuters has reported it is seeking to raise up to $2 billion. The company made 1.65 billion yuan ($255 million) in the first half of the year, representing a 92% increase from the same period a year ago, despite posting a 726.2 million yuan adjusted net loss.

However the filing’s lengthy list of risk factors is a reminder of the tough situation Chinese tech champions face these days: increasing regulatory scrutiny in both China and the US.

Over the next next few months, key data security and privacy legislation will take effect in China, posing huge uncertainties for the country’s tech giants, especially those with a massive trove of user data like SenseTime.

In the filing, the firm listed “complex and evolving laws, regulations and governmental policies regarding privacy and data protection” as a risk factor, citing regulations including China’s upcoming Data Security Law, which takes effect this Wednesday (Sept. 1), and the country’s Personal Information Protection Law that will be implemented in November as two examples. The two laws, combined with measures on automobile data security, point to Beijing’s vision to both control private data as a national asset, and use it as a key resource for economic production.

The firm also listed China’s draft cybersecurity review measures, which would require firms of over 1 million user data to go through security checks before listing overseas, as one regulation that could have a potential impact on tech companies. The company said it could not predict the impact of the draft measures at this stage, and it is unclear whether the rules will apply to its business.

China is reportedly considering exempting companies that want to list in Hong Kong from the cybersecurity review process, which could redirect more IPO windfalls to a city that’s already seen growing listings of Chinese companies. “Failure to comply with the cybersecurity and data privacy requirements in a timely manner, or at all, may subject us to government enforcement actions and investigations, fines, penalties, suspension of our non-compliant operations, among other sanctions,” SenseTime said in the filing.

It’s not only China that the company faces troubles from on the regulatory front.

In 2019, one of its subsidiaries was put on a US trade blacklist alongside other seven Chinese tech firms for its alleged role in Beijing’s human rights abuses, including surveillance, against minority Muslim groups in the western region of Xinjiang. SenseTime said in the filing that if the unit remains on the list it may not be able to “compete effectively” in certain business lines. The blacklisted unit is restricted from purchasing or accessing US goods, software and technology.

Beijing has repeatedly denied allegations that more than 1 million Muslims have been subjected to forcible detention in camps in Xinjiang, while SenseTime has said it does “not have any business in, nor are we aware of our technology being used in the Xinjiang region.”

SenseTime declined to comment on questions regarding China’s data laws. With regard to the US entity list, a company representative said, “As we have always maintained, we are deeply disappointed by the [Bureau of Industry and Security’s] decision, and are working closely with related parties to resolve the situation.”

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