- UP Fintech Holding Limited (NASDAQ:TIGR) is a US listed China-based online brokerage platform that has created an elaborate scheme to enable Chinese citizens to trade in foreign securities, bypassing regulation in China.
- TIGR is operating without the proper license(s) required for Chinese citizens to trade foreign securities and has already been subject to a government investigation by the China Securities Regulatory Commission (CSRC).
- We provide evidence that TIGR’s competitors have shut down their businesses, which we believe was a result of regulatory pressure. This evidence combined with our research on the Chinese regulatory environment suggests that TIGR’s brokerage platform could be shut down any day.
- China CLEARLY restricts its citizens from converting RMB to USD for investment purposes. Our investigator in China opened an account with TIGR and recorded conversations with customer service. Our investigator was instructed to make fraudulent claims to the local bank in China about the use of funds so that RMB could be exchanged for USD and deposited into TIGR’s overseas trading account.
- For the individual account holder, this is outright money laundering and nothing but illegal, and could even cause enforcement action against people who have opened brokerage accounts with TIGR. The fact that TIGR directs applicants to lie and break the law is enabling the applicant to perform money laundering. Furthermore, in our opinion, the fact that the platform facilitates this puts it at risk of violating anti-money laundering laws.
- The company seemingly used New Zealand licenses to book revenues from 2016 to 2018 that the company was unable to book from either U.S (where most execution and clearing of trades happens through Interactive Brokers Group, Inc. (NASDAQ:IBKR)) and China (where most of TIGR’s clients are located and where the company does not have the proper license(s) to provide brokerage services).
- The majority of TIGR’s revenue are generated from commission revenue through its relationship with Interactive Brokers, subjecting the company to significant risk due to the zero commission wars taking place in the U.S. brokerage sector.
- The company has made interest free loans to related parties including insiders, which we view as a red flag for corporate governance.
UP Fintech Holdings Ltd (NASDAQ: TIGR) is a China-based online brokerage firm which offers an app and online trading platform that enables Chinese investors to trade equities and other financial instruments on US stock markets, the Hong Kong exchanges, and multiple other exchanges in various countries.
In September 2019, the Chief Accountant of China’s State Administration of Foreign Exchange (SAFE), Tianqi Sun, unequivocally warned that companies providing cross border financial services without a Chinese license are engaging in illegal financial activity:
“If companies obtained overseas license(s) yet didn’t obtain our country’s license(s) to provide cross-border financial services for our country’s consumers and investors, in various business forms within our border, this is like driving without a license, and it is an invasion to a country’s financial border and it is an invasion to a country’s financial sovereignty, and it is an illegal financial activity. Relevant financial regulating departments should seriously investigate and heavily punish this kind of driving-without-license activities within our country, and foreign exchange administrative department need to severely punish the rule and law-breaking activities that are related to foreign currencies,”
Additionally, the China Securities Regulatory Commission, when asked specifically about TIGR and other trading platforms, answered:
“…China’s <Securities Law> stipulates that no enterprise or individual may operate securities business without the approval of the securities regulatory authority under the State Council. China’s <Regulations on the Supervision and Administration of Securities Companies> stipulates that overseas securities operating institutions that operate securities business in China shall be subject to the approval of the securities regulatory authority under the State Council.”
In another instance the CRSC stated:
“…we have not approved any domestic or foreign institutions to carry out services for domestic investors to participate in overseas securities transactions.”
The message is clear: It doesn’t matter if the securities business being operated is domestic or foreign, as long as it conducts business on China’s territory, it needs to obtain adequate license(s) from the Chinese government.
Despite clear warnings, TIGR is operating its “brokerage” firm without a PRC brokerage license(s). This means that TIGR might not be permitted to generate commissions revenue in China.
However, we believe that TIGR developed a complicated scheme to bypass necessary license requirements and book MOST of its revenue overseas through its overseas license(s) and relationship with foreign brokers. TIGR went even as far as instructing clients to blatantly disrespect PRC laws and lie to their local banks in China to avoid capital controls. We provide evidence showing that TIGR’s client service representative explained to our investigator, who lives in China and opened a TIGR account, how to lie about the “purpose of funds” to his local bank in order to convert RMB to U.S. dollars so the investigator could deposit funds into TIGR’s overseas trading account. The law in China is very clear. When converting RMB to foreign currencies to send abroad, the “use of funds” cannot be for investment purposes.
According to its prospectus, TIGR is “the largest online platform for trading U.S. securities focusing on Chinese investors globally in terms of trading volume in 2017, with a market share of 58.4%, and also one of the most recognized fintech brands among global Chinese according to the iResearch Report.” The prospectus also stated, “Most of our customers are PRC citizens resident in China”.
TIGR has obtained brokerage or financial advisory licenses in a few foreign jurisdictions, including the U.S., and has “partnered” with Interactive Brokers (NASDAQ: IBKR) for the execution and clearing of the trades. On the surface, this appears to make TIGR look legitimate. However, we want to caution investors that TIGR’s efforts are masking a key problem: The bulk of revenue TIGR generates is from foreign trading activities by Chinese citizens living in China. Further, without a license TIGR is not allowed to take money from Chinese investors to trade in overseas securities. Additionally, TIGR cannot earn book brokerage revenue in China.
We believe TIGR’s conduct in China is putting the company at immediate risk of serious enforcement action, a suspension or even a complete shutdown. We also believe that the Chinese media will expose TIGR, potentially causing panic to TIGR’s current clients, leading many to quickly close and withdraw money from their TIGR accounts.
TIGR’s current situation reminds us of Natural Health Trends (NASDAQ: NHTC). NHTC operated its business in China without a proper license. Earlier this year, the company’s stock price imploded after PRC regulators took action to suspend its operations in China. We actually originally broke the story of potential fraud at the company by exposing NHTC’s efforts to coordinate what we believed to be an illegal multi-level marketing business within China.
A key point to understanding the risks associated with investing in NHTC is that it didn’t have a license to operate an MLM business in China, so it devised a way to bypass not having a license, to still operate in China. The point: to operate business in China, one needs to have a license. With TIGR, it’s even more important because it is a financial services company.
The fact that the trade tensions between the US and China is at heightened levels, increases the likelihood that China will take action. Furthermore, given media reports that the US government was considering delisting US-listed China-based companies, and restricting pension funds from investing in them, increases the risk to TIGR’s operating and listing status in the US.
Furthermore, earlier this year, Senator Rubio proposed a Bill (GEO’s work was referenced) called Ensuring Quality In formation and Transparency for Abroad-Based Listingson our Exchanges’’ or the ‘‘EQUITABLE Act’’, to ban Chinese & foreign firms that flaunt U.S. Laws from U.S. Exchanges. So, when investing in TIGR, one now only has to worry about China taking action against the company, but also need to conisder that U.S. regulators are on high alert.
The Chinese Regulatory Environment
In order to put our research into perspective, it is useful to understand the regulatory environment in China, as well as public comments issued by the CSRC about one of TIGR’s competitors that were made two months after the competitor terminated its business. As we will discuss later, TIGR is also mentioned in this notice (see exhibit B under section titled “Regulator has commented on TIGR specifically”. In short, the Chinese government is becoming stricter on enforcing regulation on capital controls and operating licenses in the brokerage industry.
It is widely known that China has been very strict on its capital controls (i.e. link), extremely limiting the ability of citizens to transfer RMB out of the country.
Furthermore, we believe the Chinese government may choose to enforce capital controls more stringently because of depreciating RMB in the ongoing trade war, and secondly, because of reports the U.S. government is considering delisting US Listed China based companies.
in September this year, it was reported that the Chief Accountant of China’s State Administration of Foreign Exchange (SAFE), Tianqi Sun, stated in a speech named “Fintech and Cross-Border Financial Services”, that both domestic and overseas institutions need to abide China’s laws by operating with adequate licenses. Although the statement was mainly related to the cross-border payments, the government’s attitude toward any institution that conducts cross-border financial services business is clear: It doesn’t matter if the institution is domestic or foreign, as long as it conducts business on China’s territory, it needs to obtain adequate licenses from the Chinese government. Below is the quote from the article which was translated and paraphrased. Sun, warned:
“If companies obtained overseas license(s) yet didn’t obtain our country’s license(s) to provide cross-border financial services for our country’s consumers and investors, in various business forms within our border, this is like driving without a license, and it is an invasion to a country’s financial border and it is an invasion to a country’s financial sovereignty, and it is an illegal financial activity. Relevant financial regulating departments should seriously investigate and heavily punish this kind of driving-without-license activities within our country, and foreign exchange administrative department need to severely punish the rule and law-breaking activities that are related to foreign currencies.”
Going through TIGR’s Sign-Up Process
TIGR Provides online brokerage services in China in partnership with Interactive Brokers. Our research indicates that TIGR is nothing but the agent to channel money out of China into overseas trading accounts by illicit means. We do not believe TIGR’s business is sustainable, since it is based on helping Chinese citizens circumvent its governments capital control laws, but it gets even worse. Below is the general process of signing up for a global TIGR account, along with wiring money into, trading on, and wiring money out of Tiger’s trading platform:
We have obtained recordings that prove that TIGR’s customer service explicitly instructs its customers to lie to their domestic bank. Our investigator was told during the sign-up process to make false statements to the bank.
- When our investigator contacted a TIGR customer service rep to inquire about how to convert RMB to USD in order to deposit his money in a TIGR global account, the investigator was told to lie about the usage of the funds.
- When the investigator asked about how to wire the money from the domestic bank account to the TIGR overseas trading account, the investigator was told to lie about the use of proceeds.
- After the exchanged foreign currency is transferred to TIGR’s global trading account, it then can be wired back through Interactive Brokers’ platform.
Evidence that the company is helping clients lie on the usage of their exchanged USD
Our investigator contacted a TIGR customer service rep to get clarification on how to open an account on TIGR’s platform, which included how to convert RMB to USD to deposit into a local bank account so that the money could be wired to TIGR’s foreign trading account. The customer service rep explicitly told our investigator that most clients choose personal travelling as funds usage purpose for their purchased USD using RMB. This happened after our investigator explicitly expressed that investigator’s interest is to use the purchased USD to invest in U.S. stocks.
As can be seen on the flow chart Exhibit A above, there are two steps involved before USD can reach TIGR’s trading account to trade U.S. stocks: The client needs to 1) use their RMB to purchase USD from China’s domestic bank; 2) wire the purchased USD to their TIGR overseas trading account. Our investigator asked TIGR’s customer service for guidance on how to proceed with these two parts.
(Step 1) Transcript excerpt: When Investigator Asked about Purchasing USD using RMB in China’s Domestic Bank:
Investigator: So, purchasing USD we choose personal travelling, and the destination we choose Hong Kong, because eventually the money will be transferred to Hong Kong, right?
Customer Service: Yes.
(Step 2) Transcript excerpt: When Investigator Asked How to Choose the Usage Purpose of the Exchanged USD’s (from RMB) during the Wiring Process, and investigator explicitly stated that investigator is looking to use the deposited USD to trade U.S. stocks:
Customer Service: Regarding the [purchased USD] wiring, it needs to be the same as what you stated to your domestic bank when you purchased USD using your RMB, and usually most clients choose overseas travelling.
Investigator: Choose overseas travelling, right?
Customer Service: can choose choices such as personal travelling, travelling for personal reasons.
Investigator: It has multiple choices, like business travelling expense, official visiting expense, etc
Customer Service: They are all good, you can choose one of them.
Investigator: Oh, personal travelling, personal vacation, personal family member visiting, they are all good [choices]?
Customer Service: Yes, usually would choose personal traveling.
TIGR’s customer service rep clearly stated that, when purchasing USD using RMB from the domestic bank, clients need to make sure the funds usage purpose disclosed to the domestic bank is the same as the usage purpose that clients are going to choose when wiring USD into TIGR’s trading account, and most people would choose personal travelling as the usage.
These instructions are illegal, because the TIGR client representative understood that our investigator wanted to purchase USD with RMB to trade foreign securities. The rep should have told our investigator that RMB must not be converted to USD for investment purposes. Specifically, the representative should have informed the investigator to choose the appropriate box that would match with the funds usage of USD. Furthermore, the customer service rep probably should have told our investigator that you cannot purchase USD with RMB to trade foreign securities at TIGR and that the investigator could be subject to penalties, ranging from monetary fines of 30% of the exchanged amount to criminal charges, according to Decree No. 532 of the State Council of the People’s Republic of China, Article 39.
Article 39 To penalize foreign exchange evasion schemes, such as transferring foreign exchange abroad in violation of the regulations or transferring domestic capital abroad by fraudulent means, the foreign exchange administration agencies shall order the foreign exchange in question to be repatriated and impose a penalty not exceeding thirty percent of the amount involved in the evasion scheme; in the case of serious violations, the penalty imposed will be in the range of more than thirty percent and less than one hundred percent of the amount involved in the evasion scheme; in the case of criminal offence, a criminal prosecution shall proceed.
Our investigator also inquired as to how the funds would be eventually wired back to his local bank in China from TIGR’s overseas trading account. The answer in the following transcript provides clarification on two matters:
- Interactive Brokers provide clearing capabilities for TIGR global accounts
- The investigator would have to use Interactive Brokers platform to wire money from TIGR’s overseas trading account back to the investigator’s local bank in China
Transcript excerpt: When Investigator Asked about How Investigator Could Wire the Money on TIGR’s Trading Account Back to Investigator:
Customer Service: The clearing service provider for Tiger Broker’s global account is Interactive Brokers. You will need to log on U.S. Interactive Brokers’ official website, filling out the money withdrawing and related banking information [to withdraw the money from TIGR’s overseas trading account].
Even though it is disclosed that Interactive Brokers is TIGR’s clearing service provider, we find it strange that during our investigation, clients of TIGR, who have their money in USD on TIGR’s trading platform, need to log onto Interactive Brokers’ website in the US to wire their money back to their local bank account in China. That begs the question:
- Does TIGR even have the ability to wire money back to its customers in China?
- Or does it have to do with TIGR not having the required license in China?
More concerning, what if Interactive Brokers, for whatever reason, decides to cease providing clearing services for TIGR in the future? One reason we can think of is that China regulators could demand Interactive Brokers to cease all cooperation with TIGR if they determine that TIGR is advising its clients to lie about the funds usage purpose when exchanging RMB to USD to trade in foreign securities. If this occurred, how could TIGR’s clients be able to wire their money from TIGR’s foreign trading account back to themselves in China? We believe the answer to this question is no, meaning if Interactive Brokers ceases its partnership with TIGR for any reason, TIGR’s clients might not be able to wire the money from TIGR’s trading account back to their domestic bank account in China.
As we will discuss next, the CSRC has warned PRC citizens who trade overseas securities that, because of the lack of legal protections, Chinese citizens’ rights and interests will not be adequately protected if disputes between investors and trading platforms occur.
Regulator has commented on TIGR specifically
The statement of SAFE’s chief accountant cited earlier in our report is unmistakably clear: Whether you are a domestic or foreign entity, you must obtain the proper license(s) in order to offer brokerage service to citizens in mainland China. Our research indicates that TIGR is in clear violation of the SAFE official’s statements. In fact, CSRC (China Securities Regulatory Commission) had already commented on TIGR specifically before.
In July 2016, CSRC had already posted comments on their website regarding certain online brokers, including Tiger Brokers (TIGR), that provides trading services for overseas securities.
Question: Recently I’ve noticed that websites and mobile portals such as “Tiger Broker [TIGR]”, “Futu Network”, and “Jimu Stock” provide U.S. and Hong Kong stock trading services, can I participate in them?
Answer (from CSRC): Recently, some overseas securities operating institutions have cooperated with domestic Internet companies to provide trading channels and services for domestic investors to invest in overseas securities markets through the platform websites or mobile apps of domestic Internet companies. China’s <Securities Law> stipulates that no enterprise or individual may operate securities business without the approval of the securities regulatory authority under the State Council. China’s <Regulations on the Supervision and Administration of Securities Companies> stipulates that overseas securities operating institutions that operate securities business in China shall be subject to the approval of the securities regulatory authority under the State Council. At present, apart from the Qualified Domestic Institutional Investors (QDII) and the “Shanghai-Hong Kong Stock Connect” mechanism, we have not approved any domestic or foreign institutions to carry out services for domestic investors to participate in overseas securities transactions. When domestic investors participate in overseas securities market transactions through domestic internet companies’ platform website or mobile portal, due to lack of corresponding legal protections and that the investment accounts and funds being overseas, once disputes occur, the rights and interests of investors will not be adequately protected. Please do not participate in such investments to avoid losses.
According to the current laws and regulations, domestic residents can invest in overseas securities markets by purchasing qualified domestic institutional investors (QDII) fund product shares and participating in “Shanghai-Hong Kong Stock Connect” transactions. Please participate in the overseas securities market investment through legal channels, so as not to be deceived.
Based on the answer provided by CSRC, it is clear to us that these online overseas trading platforms, including TIGR, did not obtain necessary approvals from the PRC government to provide services to Chinese investors living in China who trade overseas securities. The CSRC also warned of the risks investors would face once disputes occur between them and these trading platforms.
Comparable Online Brokers Have Shut Down in China
Case 1: “Jimu Stock”
“Jimu Stock” was a private China based online trading platform which did not have proper licenses in China or abroad.
It’s worth noting that “Jimu Stock”, which was previously mentioned in the exhibit B notice by CSRC along with TIGR and Futu Network, was reported (by Sina Finance) to have shut down its online trading services and was sold to another online brokerage business BBAE in May 2016, another (non public) China-based online brokerage firm, which we believe is also operating illegally. It is important to understand that BBAE bought “Jimu Stock” before CSRC published the notice shown in Exhibit B. It is also important to note that “Jimu Stock”’s parent company PINTEC, a p2p lending platform in China, was in communication with the CSRC before the 2016 July notice, and specifically stated that the trading features on “Jimu Stock” had already been terminated in response to the media’s inquiry about the July notice. Based on our knowledge, “Jimu” does not hold any Chinese or foreign stock brokerage licenses.
The Sina Finance report indicates that Jimu’s parent company dropped the brokerage business after communication with regulators.
On July 26, CSRC issued a warning on overseas investment risks on its official website. [It] stated that there are no legal guarantees for websites and mobile portals of companies such as “Jimu Stock” and “Tiger Securities”. Regarding this issue, PINTEC Group responded to the internet finance news center that the trading features on “Jimu Stock” mobile application have been terminated.
In its response, PINTEC Group positioned itself as an intelligent financial service provider. After business strategic repositioning, the Group is determined to focus on big data processing and fintech research and development, providing enterprises and consumers with the most efficient intelligent financial services and solutions. The strategic focus is intelligence credit and digital asset allocation business.
The PINTEC Group has maintained close communication with the regulatory authorities, taking into account regulatory requirements and the strategic positioning of the Group. As a non-core business, “Jimu Stock”’s function involving US stocks trading has been sold to a US licensed investment consulting company BBAE at the end of May 2016. The user migration work stated in early June 2016, and this work has been completed.
At present, the “Jimu Stock” APP’s trading function has been offline, but still retains the market information function, and continues to provide timely and accurate information services for users who pay attention to China and the global securities markets.
Case 2: “Meibao Jinrong”
Another China-based online trading platform called “Meibao Jinrong” (美豹金融) also appears to have shut down its services, in this case as recently as 2018. Similar to “Jimu Stock”, “Meibao Jinrong” did not have the required brokerage licenses in China or abroad. The company “claimed” that it launched the U.S. license application process and users therefore needed to liquidate their positions in their accounts and transfer the money out of their “Meibao Jinrong” trading accounts. According to this article, the notice was issued in January 2018. So far, more than one and half years later, we cannot find evidence that indicates “Meibao Jinrong” has resumed servicing its previous customers. We don’t buy the company’s excuse that its customers had to liquidate their accounts in order for “Meibao Jinrong” to apply for a US license, and we believe the shut-down was a direct reaction to regulatory pressure. We also believe the company realized that even if they had acquired a US license, they still could not legally operate a stock trading platform in China without required license in China. It’s clear to us that it’s getting tougher for companies to get away with offering illegal cross-border brokerage services, even if they possess licenses in other countries other than China.
In order to provide our users with premium quality trading services, “Mei Bao” has officially commenced our brokerage application process in the United States. After the license is approved, the account system will be fully upgraded and the users will need to open a new account to conduct future trading transactions.
Since stocks and funds cannot be transferred between the old and new account, users will need to withdraw funds from the old account before the license is officially approved to prepare for the upgrade of the system. We recommend that you withdraw your funds before February 15th. Thank you for your support to “Mei Bao Finance” and we wish you the best in your investments.
License Issues Persist
TIGR does not hold the appropriate license(s) to operate brokerage services in China. The risk factors section of TIGR’s going public prospectus stated that they might be subject to license requirements by China’s regulatory body CSRC.
“…For instance, if certain of our activities in China were deemed by relevant regulators as provision of securities brokerage services, future brokerage services, securities or futures investment consulting services or stock option brokerage business, we might be subject to licensing requirements from the CSRC.” – prospectus, p.18
Clearly there is a disconnect here: TIGR openly admits to providing brokerage services to Chinese citizens without license(s) or being an approved exempt channel. TIGR seem unable or unwilling to correctly interpret the specific statement made by SAFE’s Chief accountant that regardless where a company wants to provide its financial services (whether being in China or abroad), it has to possess proper licenses in China. Also, it appears that the CSRC is fully aware of how TIGR is pursuing its brokerage business operations in China.
In connection with the license issues TIGR has received a rectification notice by the CSRC in September 2016, and we believe concerns continue to persist.
“In July 2016, the CSRC posted an investor alert on its website warning investors that except for certain investment channels approved by the CSRC under the PRC laws, the CSRC has not approved any domestic or foreign institutions to provide services for domestic investors to participate in overseas securities trading. In September 2016, we received a rectification notice issued by the Beijing branch of the CSRC. Following such notice, we took certain rectification measures in order to comply with the requirements set forth therein, and we provided written responses to such authority promptly. We communicate with the Beijing branch of the CSRC from time to time to ensure our business follow their requirements. As of the date of this prospectus, we have not received further written rectification requirements from the CSRC.” – prospectus, p.18
Three years after this letter, the company has yet to receive a brokerage license in China. We believe this risk factor will become a reality in the near future, especially given the trade tension and a more stringent capital control policy. One thing is clear, according to the comments made by CSRC and SAFE, TIGR appears to be conducting an illegal brokerage business in China. It is possible that, upon a request from the CSRC, that the company would need to temporarily suspend its current business or even shut down its business, before it could try to obtain required license(s) from Chinese regulators.
“…However, we cannot assure you that the rectifications we have made will fully satisfy the relevant regulatory authorities’ requirements and we cannot assure you that we will not be subject to further investigation or scrutiny from regulators even though we had not yet received any negative opinion or penalty for the activities of our PRC entities or services provided to PRC investors so far. If we are required to make further rectifications, our business and financial condition could be materially and adversely affected. If we fail to receive required permits in a timely manner or at all, or obtain or renew any permits and certificates, we may be subject to fines, confiscation of the gains derived from our non-compliant activities, suspension of our non-compliant activities or claims for compensation of any economic loss suffered by our customers or other relevant parties.” – prospectus, p.18
This was not the only time TIGR got regulatory attention. Throughout 2016 TIGR received notices and inspection from SAFE regarding fund transfers.
”In connection with our customers’ transfer of funds, in March 2016, we received a notice from the SAFE requiring us to review and report situations regarding our customers’ account opening and fund transfers on our platform. Thereafter, the regulator conducted an onsite inspection collecting information on our customers’ compliance with the relevant SAFE rules and regulations since the inception of our business. We submitted the relevant materials as requested by the regulator by the end of March 2016. In December 2016, the SAFE made another visit to our company and we submitted some additional documents per its requirements. As of the date of this prospectus, we have not received any further inquiries or notices from the SAFE regulators. For more details of the notice aforementioned and our measures in response thereto, please see “Regulations—PRC Regulations Relating to the Individual Foreign Exchange.” Since the PRC authorities and the commercial banks designated by the SAFE to conduct foreign exchange services have significant amount of discretion in interpreting, implementing and enforcing the relevant foreign exchange rules and regulations, and for many other factors that are beyond our control and anticipation, we may face more severe consequences, including but not limited to being asked to take additional and burdensome measures to monitor the source and use of the foreign currency funds in the accounts of our customers or suspend our operations pending an investigation or indefinitely. As a result, our business, results of operations and financial condition may be materially and adversely affected.” – prospectus, p.19
In our opinion, this setup is ridiculous and an offense to regulators. Most of TIGR’s clients are Chinese citizens, but TIGR does not have a brokerage license in China. The clients trade mostly in US securities through TIGR’s connection with Interactive Brokers. As of 2018, most of the revenue generated by TIGR has been booked through New Zealand, where the company holds licenses.
It appears that TIGR is not exactly a broker, rather it is acting as an intermediary partnering with Interactive Brokers that helps Chinese citizens exchange USD out of China to trade overseas securities. Moreover, it also seems like the company was using the New Zealand licenses to book revenue that the company was unable to book from either U.S (where most execution and clearing of trades happen) and China (where most of clients are located and where the company does not have a proper license(s) to provide brokerage services).
The Exhibit E below illustrates the strange setup of TIGR.
The manner of which TIGR has set up its business to earn revenue as well as the instruction that TIGR’s customer service gave to our investigator regarding the funds usage purpose of exchanged USD has led us to conclude that it is only a question of time until Chinese regulators suspend or even shut down TIGR’s business. We also think it is possible that Interactive Brokers could terminate their relationship with TIGR or that US regulators step in as the climate in the China-US relationship continues to worsen. The latest news reports on the Trump administration considering to delist Chinese companies from US exchanges should be a concern to investors, especially for TIGR whose main business is to provide Chinese clients an avenue to trade U.S stocks. TIGR discloses material weaknesses in their internal controls, making the whole situation more concerning.
Numerous Customer Complaints
We have found countless customer complaints, including some where people say it is very hard to transfer funds out of their TIGR overseas trading account into their mainland China local bank account. Given that TIGR operates without licenses in China, its customers also have no government protection in case something goes wrong.
Seemly Failed Yunji Inc (NASDAQ: YJ) IPO Subscription
On May 3, 2019, many customers went on TIGR’s official website and other investment forums to complain about the subscribed new shares of YJ.
For example, one customer showed a screen shot from the TIGR app on the TIGR forum, YJ’s share subscription page, that confirmed his/her subscribed share count is 3,100, but in reality he/she only received 810 shares. This is about ¼ of what was confirmed by TIGR, yet YJ’s new shares offering only decreased from the originally planned offering amount of 13.5 million ADSs to 11 million.
These are some more examples of customer complaints from TIGR’s forum and that TIGR’s customer experience has not been favorable.
Tremendous Risk Ahead Regarding TIGR’s Commission Revenue
The majority of TIGR’s revenue comes from commission fees the company charges its customers for trading of securities. For example, in 2018, revenues from commissions were 78% of the total revenues, and for the first half of 2019, that percentage dropped to 62%. Furthermore, we believe recent news in the U.S. brokerage sector putting pressure on brokers to offer zero commission trading could be a huge threat to TIGR’s commissions business in the future and its survival (if Chinese regulators don’t take action first). In fact, IBKR already announced it will offer zero commission trading.
On October 1, 2019, The Charles Schwab Corporation (NYSE: SCHW), one of the largest discount brokerage firms in U.S., announced that, starting on October 7, 2019, the company will eliminate commissions for the trading of U.S. stocks, ETFs, and Options. This announcement sent the stocks of several other notable brokerage firms, including E*Trade Financial Corp (NASDAQ: ETFC), TD Ameritrade Holding Corp (NASDAQ: AMTD), and Interactive Brokers Group (IEX: IBKR), considerably lower on that day, as shown on the Exhibit F below. Later on, TD Ameritrade and E*Trade followed suit and lowered the related investment products’ commission to 0.
Interactive Brokers already introduced its new offering, IBKR Lite, on September 26, 2019, that includes features such as “Zero commissions on US exchange-listed stocks and ETFs” and “Trading non-US stocks, options, futures and fixed income at the lowest commissions”. IBKR Lite will be made available to U.S. residents in October. However, considering the commission war between all these online US brokerage firms, we believe it’s just a matter of time before Interactive Brokers will try expand this IBKR Lite offering to residents in other countries, including China. Furthermore, TIGR and other brokers that offer services for Chinese citizens to trade overseas securities might need to follow suit. Since Interactive Brokers is TIGR’s clearing service provider, commissions split with Interactive brokers make up the majority of TIGR’s total revenues in the past few years. We believe TIGR’s revenues could get a major hit once IBKR decides to expand lower or 0 commission offering to the customers in China.
According TIGR’s prospectus:
“Pursuant to the agreement with our primary clearing agent, Interactive Brokers, we receive a portion of commission fees paid by our customers every time Interactive Brokers executes and clears a trade order. For consolidated accounts, we receive commissions from customers and pay the execution and clearing fees to our clearing agents. For fully disclosed accounts, every time Interactive Brokers executes and clears a trade, it collects the commissions, deducts a certain portion as execution and clearing fees and returns the rest of the commissions to us.” – prospectus, p.86
This statement shows that Interactive Brokers would collect the trading commissions from the fully disclosed accounts, and TIGR would collect the trading commissions from the consolidated accounts. For those who are not familiar with these two accounts, below is the description provided by TIGR’s prospectus (p.128):
Under the consolidated accounts, our customers only open accounts and place trades with our platform. We are responsible for the “know your client”, or KYC, and anti-money laundering, or AML, procedures including customer identity verification, account approval and disapproval, record keeping, monitoring and supervision of the accounts and other compliance functions, which are no less stringent than the procedures performed for fully disclosed account customers. We work with Interactive Brokers and other agents for order execution, clearing and settlement services. Consolidated accounts offer more functions, products and services than fully disclosed accounts, such as innovative financial instruments. With our advanced technology and third party database, the account opening process for consolidated accounts is more efficient and smooth.
Under the fully disclosed accounts, we provide a user-friendly trading interface and infrastructure for the customers and we engage Interactive Brokers to perform the execution, clearing and settlement services. We are responsible for technical support, customer service and marketing to the fully disclosed account customers. We also perform our own KYC procedures to verify the identity and financial condition of potential customers. In addition to the account on our platform, each of our customers also open a corresponding account with Interactive Brokers. Interactive Brokers is required to perform key functions in respect of KYC and AML procedures including customer identities verification, account approval and disapprovals and continuing monitoring and supervision of the accounts.
The table below gives our reader a general sense on the breakdown commission revenues from these two accounts.
It can be found that in the past three years from 2016 to 2018, commission revenues accounts for 96%, 89% and 78% of TIGR’s total revenues, respectively. Among the commission revenues, commissions revenues from fully disclosed accounts consist of 100%, 99% and 97% in 2016, 2017, and 2018, respectively. Thus, it is fair to say that TIGR’s commission business is essentially relying on how much Interactive Brokers charges. If Interactive Brokers decides to lower the commission for TIGR’s customers to close to 0, then almost all the commissions that Interactive Brokers would normally collect by executing and clearing TIGR’s customers’ trades would be gone, but in the meantime, Interactive Brokers might still charge TIGR for the execution and clearing fees. Some might argue that the percentage of commissions revenue as of the total revenues for TIGR has been decreasing along the time. However, for a company like TIGR that does not have scale and has not been profitable for years, a decline in its total revenues, which we believe will eventually happen, would, in our opinion, eliminate any growth story and lead to investors abandoning the stock.
Where the Company Sees Potential, We See Immense Risk
In the most recent Q2 2019 Earnings Call, the CFO of the company, John Zeng stated that the company will see a diversification of revenue and strong interest income as the develops more “Consolidated accounts”. While TIGR has high hopes of its Consolidated Accounts, we believe this is a very risky move, especially for TIGR’s customers.
According to Prospectus:
While we maintain certain insurance for Top Capital Partners in New Zealand such as professional liability insurance, directors’ and officers’ insurance, we do not maintain any other insurance policies for any other entities, and for Top Capital Partners, there is no assurance that our insurance coverage will be adequate to cover potential losses. In addition, customers of our consolidated accounts are not protected under the scheme of the Securities Investor Protection Corporation, or the SIPC, and we have neither purchased any commercial insurance to cover similar risks. Under the applicable laws and regulations in the relevant jurisdictions such as New Zealand, the United States and China, we are not required to, and we do not, maintain any insurance in relation to our business operations, such as data security insurance, business interruption insurance, or liability insurance against liabilities arising from customer complaints and litigation or other aspects of our business. Our current insurance policies may not protect us against such losses and liabilities.
We have previously defined “fully disclosed accounts and consolidated accounts” in the “Commission Revenue Risk” section of this report. While more consolidated accounts mean more interest revenue for TIGR, it also means very limited protection for clients participating in the consolidated accounts, as they are no longer covered by insurance nor by Securities Investor Protection Corporation (SIPC). According to SIPC’s website:
SIPC was created under the Securities Investor Protection Act as a non-profit membership corporation. SIPC oversees the liquidation of member firms that close when the firm is bankrupt or in financial trouble, and customer assets are missing. In a liquidation under the Securities Investor Protection Act, SIPC and the court-appointed Trustee work to return customers’ securities and cash as quickly as possible. Within limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only).
According to this Sohu article, on of November 1, 2018, the TIGR platform issued a notice indicating that TIGR has officially become a non-disclosed Broker. After this “system upgrade”, all customer accounts will be migrated to TIGR’s “Consolidated accounts” and TIGR would be responsible for all client transactions and fund trusteeship. Though theoretically speaking, this “Consolidated Account” is still covered by SIPC, in reality customers would have no agreement with Interactive Brokers. This is extremely risky for each client in two ways:
- Clients are no longer protected by SIPC and would not be able to be insured nor be eligible for up to 250 thousand-dollar claims for their Consolidated Accounts.
- TIGR would operate without supervision and would have autonomy over the money in its “Consolidated Account”. Who knows what could go wrong from that point on.
CEO and Other Related Parties Obtained Interest-Free Loans from TIGR
On several occasions TIGR provided interest-free loans to related parties, including companies controlled by management, and especially the CEO of TIGR directly.
According to prospectus:
Loans to Bluesea Fintech LLC, Alphalion Group Limited and Guangzhou 88 Technology Limited
We had short-term interest-free loans in an aggregate amount of US$1.8 million, US$1.5 million and US$0.8 million to each of Bluesea Fintech LLC, Alphalion Group Limited and Guangzhou 88 Technology Limited, respectively, as of December 31, 2018 to facilitate such entities’ daily operational cash flow needs. These three entities are controlled by the management of a subsidiary of Ningxia Rongke.
ln the first quarter of 2019, we and our affiliates entered into a series of agreements with respective parties regarding the investment in Alphalion Technology Holding Limited. Under the agreements, we and our affiliates agreed to convert the short-term interest-free loans to each of Alphalion Group Limited and Bluesea Fintech LLC into equal value equity investment in their original parent company, Alphalion Technology Holding Limited.
Loans to Officers and Directors
We extended interest-free loans to Mr. Tianhua Wu and officers of our VIE company Ningxia Rongke, and its subsidiaries in China. The aggregate amount of the loans due from these officers and directors was US$1.3 million and US$1.3 million as of December 31, 2017 and 2018, respectively. All of these loans were repaid in full and as of February 22, 2019 the aggregate amount of loans due from these officers and directors was nil.
The interest-free loans made to related parties such as Bluesea Fintech LLC and Alphalion Group Limited amounted to $3.3m USD that were later converted into equity investments in the parent company Alphalion Technology Holding Limited.
Shareholders have received no information about what Alphalion Technology Holding Limited actually does, nor do we know how much Alphalion is worth. This seems very worrisome to us.
Interest-free loans made to the CEO and other officers of the VIE company Ningxia Rongke amounted to $1.3 million. Though the loans were supposedly paid back in full in February 22, 2019. We still find it disturbing that insiders are frequently taking interest-free loans from the company.
We have uncovered a range of issues that we believe make TIGR uninvestible. We believe that we have proven that the company is conducting an illegal brokerage business, and in our opinion, essentially acting as an agent for Interactive Brokers to solicit money from Chinese citizens. TIGR acquiring overseas license is nothing but a charade to portray legitimacy to US investors and divert attention from the key issue that TIGR is not licensed to provide any kind of trading services in foreign securities to Chinese citizens.
Our analysis on the Chinese regulatory environment suggests that regulatory action could be imminent. Our recordings with TIGR’s customer service, where our investigator received instructions to lie to the domestic bank, strongly support our view that TIGR will be shut down soon.
The range of related issues we highlighted make TIGR seem unfit to be a publicly traded company in the US.
Disclosure: Short TIGR at time of report.
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10/17/2019 – Tiger Brokers corrected to say UP Fintech Holdings Ltd in ‘Background’ section.