F-1 1 d363501df1.htm FORM F-1 Form F-1
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As filed with the Securities and Exchange Commission on September 22, 2017

Registration No. 333-                    

 

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM F-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

Sea Limited

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

 

Cayman Islands   7372   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

1 Fusionopolis Place, #17-10, Galaxis

Singapore 138522

+65 6270-8100

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

Cogency Global Inc.

10 East 40th Street, 10th Floor

New York, N.Y. 10016

(800) 221-0102

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

copies to:

Yanjun Wang, Esq.

Sea Limited

1 Fusionopolis Place, #17-10, Galaxis

Singapore 138522

+65 6270-8100

 

David T. Zhang, Esq.

Benjamin Su, Esq.

Benjamin W. James, Esq.

Kirkland & Ellis International LLP

c/o 26th Floor, Gloucester Tower, The Landmark

15 Queen’s Road Central, Hong Kong

+852 3761-3300

 

James C. Lin, Esq.
Davis Polk & Wardwell LLP

c/o 18th Floor, The Hong Kong Club Building

3A Chater Road, Central

Hong Kong

+852 2533-3300

 

 

Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. Emerging growth company  

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act .  

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities to be registered  

Proposed maximum
aggregate

offering price(2)(3)

  Amount of
registration fee

Class A ordinary shares, par value US$0.0005 per share(1)

  US$1,000,000,000   US$115,900

 

 

 

(1) American depositary shares issuable upon deposit of the Class A ordinary shares registered hereby will be registered under a separate registration statement on Form F-6 (Registration No. 333-                    ). Each American depositary share represents              Class A ordinary shares.
(2) Includes Class A ordinary shares initially offered and sold outside the United States that may be resold from time to time in the United States either as part of their distribution or within 40 days after the later of the effective date of this registration statement and the date the Class A ordinary shares are first bona fide offered to the public, and also includes Class A ordinary shares that may be purchased by the underwriters pursuant to an option to purchase additional ADSs. These Class A ordinary shares are not being registered for the purpose of sales outside the United States.
(3) Estimated solely for the purpose of determining the amount of registration fee in accordance with Rule 457(o) under the Securities Act of 1933.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell the securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting any offer to buy these securities in any jurisdiction where such offer or sale is not permitted.

 

Subject to Completion. Dated                     , 2017.

             American Depositary Shares

 

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Sea Limited

Representing            Class A Ordinary Shares

 

 

This is an initial public offering of American depositary shares, or ADSs, by Sea Limited.

Sea Limited is offering              ADSs to be sold in the offering.

Prior to this offering, there has been no public market for the ADSs or our ordinary shares. It is currently estimated that the initial public offering price per ADS will be between US$                     and US$                    . We have applied to list the ADSs on the New York Stock Exchange under the symbol “SE.”

We are an “emerging growth company” as defined under applicable U.S. securities laws and, as such, we are eligible for reduced public company reporting requirements.

Immediately prior to the completion of this offering, our outstanding share capital will consist of Class A ordinary shares and Class B ordinary shares. Our principal shareholders, Forrest Xiaodong Li, our founder, chairman and group chief executive officer, and Tencent Holdings Limited and its affiliates, will beneficially own all of our issued Class B ordinary shares, and will be able to exercise an aggregate of                 % of the total voting power of our total issued and outstanding ordinary shares immediately upon the completion of this offering, assuming the underwriters do not exercise their option to purchase additional ADSs. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights and certain approval rights. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to three votes and is convertible into one Class A ordinary share. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

 

 

See “Risk Factors” beginning on page 17 to read about factors you should consider before buying the ADSs.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per ADS      Total  

Initial public offering price

   US$                           US$                       

Underwriting discounts and commissions(1)

   US$      US$  

Proceeds, before expenses, to us

   US$      US$  

 

(1) For a description of compensation payable to the underwriters, see “Underwriting.”

The underwriters have the option to purchase up to an additional              ADSs from us at the initial public offering price less the underwriting discounts.

The underwriters expect to deliver the ADSs against payment in New York, New York on                     , 2017.

 

Goldman Sachs (Asia) L.L.C.    Morgan Stanley    Credit Suisse

 

 

Prospectus dated                     , 2017.


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An Introduction to Greater Southeast Asia

 

Robust Growth

  

Digital Consumers

•  Greater Southeast Asia is the 7 markets of Indonesia, Taiwan, Vietnam, Thailand, the Philippines, Malaysia and Singapore

•  585.3 million people (1)

•  US$3.0 trillion nominal GDP (1)

•  2.1x the real GDP growth rate and 1.6x the population growth rate of the United States (2)

  

•  315.4 million internet users (3)

•  237.1 million smartphone users (4)

•  US$3.5 billion online game market size growing at 19.6% CAGR (5)

•  US$23.0 billion e-commerce market size growing at 29.2% CAGR (6)

•  US$6.5 billion e-wallet (7) payment volume growing at 30.1% CAGR (8)

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(1) 2016 estimate as of April 2017, IMF Outlook
(2) 2016-2021 estimated CAGR as of April 2017, IMF Outlook
(3) As of December 31, 2016, Frost & Sullivan. Internet users are defined as unique users who access fixed or mobile internet services at least once per month
(4) As of December 31, 2016, Frost & Sullivan, based on population data from IMF Outlook. Smartphone users are defined as users with access to a smartphone. The figure does not refer to unique persons, and any person with more than one smartphone will be counted as more than one user
(5) 2016-2021 estimated CAGR calculated based on mobile and PC online game market forecasts from Newzoo and Niko Partners, respectively
(6) 2016-2021 estimated CAGR, Frost & Sullivan. Refers to e-commerce consumer spending (or gross merchandise value)
(7) E-wallet refers to a virtual container that stores value, which is used for goods and service transactions; funds may be transferred through cash, bank account, scratch cards or a variety of other means
(8) 2016-2021 estimated CAGR, IDC


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Size and Scale of Our Businesses

 

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All figures as of June 30, 2017 unless otherwise stated

(1) #1 position is derived from mobile and PC online game market ranking as estimated by Newzoo and Niko Partners, respectively
(2) For the month of June 2017
(3) According to Frost & Sullivan
(4) Average during the second quarter of 2017
(5) Repeat buyer is defined as a unique user who has made at least two orders prior to or during the specified period
(6) Refers to sellers who had at least one confirmed order during the specified period
(7) According to IDC, e-wallet refers to a virtual container that stores value, which is used for goods and service transactions; funds may be transferred through cash, bank account, scratch cards or a variety of other means


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Greater Southeast Asia’s Unique Complexities Confer

Meaningful ‘Home Court Advantages’ for Sea

 

LOGO

 

(1) IDC
(2) Internet users are defined as unique users who access fixed or mobile internet services at least once per month
(3) Smartphone users are defined as any users with access to a smartphone. The figure does not refer to unique persons, and any person with more than one smartphone will be counted as more than one user
(4) Frost & Sullivan
(5) As of December 31, 2016
(6) Frost & Sullivan, based on population data from IMF Outlook


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Risk Factors

     17  

Special Note Regarding Forward-Looking Statements and Industry Data

     54  

Use of Proceeds

     56  

Dividend Policy

     57  

Capitalization

     58  

Dilution

     60  

Enforceability of Civil Liabilities

     62  

Corporate History and Structure

     66  

Selected Consolidated Financial Data

     74  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     77  

Our Market Opportunity

     115  

Business

     133  

Regulation

     172  

Management

     193  

Principal Shareholders

     203  

Related Party Transactions

     207  

Description of Share Capital

     209  

Description of American Depositary Shares

     225  

Shares Eligible For Future Sale

     234  

Taxation

     236  

Underwriting

     246  

Expenses Related to this Offering

     257  

Legal Matters

     258  

Experts

     259  

Where You Can Find Additional Information

     260  

Index to Consolidated Financial Statements

     F-1  

 

 

You should rely only on the information contained in this prospectus or in any related free-writing prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus or in any related free-writing prospectus. We are offering to sell, and seeking offers to buy, the ADSs offered hereby, but only under circumstances and in jurisdictions where offers and sales are permitted and lawful to do so. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs.

Neither we nor any of the underwriters have taken any action that would permit a public offering of the ADSs outside the United States or permit the possession or distribution of this prospectus or any related free-writing prospectus outside the United States. Persons outside the United States who come into possession of this prospectus or any related free-writing prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of the prospectus outside the United States.

Until             , 2017 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the ADSs discussed under “Risk Factors,” before deciding whether to buy the ADSs. This prospectus contains certain estimates and information from four industry reports commissioned by us and prepared respectively by Frost & Sullivan (S) Pte Ltd, or Frost & Sullivan; International Data Corporation, or IDC; Newzoo International B.V., or Newzoo; and LMH Enterprises, Inc., DBA Niko Partners, or Niko Partners; each an independent market research firm, regarding our industries and our market positions in Greater Southeast Asia. This prospectus also contains certain estimates and information from the International Monetary Fund World Economic Outlook published in April 2017, or the IMF Outlook.

Our Mission

Our mission is to better the lives of the consumers and small businesses of Greater Southeast Asia with technology.

Our Business

We believe we are the leading internet company in Greater Southeast Asia, or GSEA, based on our number one market share by revenue in the region’s online game market, our number one market share by GMV and total orders in the region’s e-commerce market, and our position as a leader in the region’s digital payments market by e-wallet GTV, each in the first half of 2017.

We have developed an integrated platform consisting of digital entertainment (focused on online games), e-commerce, and digital financial services (focused on e-wallet services), each localized to meet the unique characteristics of GSEA. We define GSEA as the combined region of Indonesia, Taiwan, Vietnam, Thailand, the Philippines, Malaysia and Singapore. This region had 585.3 million people and gross domestic product, or GDP, of US$3.0 trillion in 2016, according to the IMF Outlook. It is also one of the world’s fastest growing regions in terms of per capita GDP and at the early stages of internet penetration. GSEA’s markets are increasingly interdependent, particularly for internet business models. From a consumer behavior perspective, these markets exhibit distinct characteristics from North Asia and South Asia, and consequently require dedicated focus and local market knowledge, which gives us a “home court advantage.”

We operate three key platforms—Garena, Shopee, and AirPay:

 

   

Our Garena platform was number one in market share by revenue in the GSEA online game market in the first half of 2017, as estimated by Newzoo and Niko Partners. Through our platform, our users can access popular and engaging mobile and PC online games that we curate and localize for each market. Garena is the exclusive operator of each of these games in GSEA. Our licensing contracts with game developers typically last three to seven years, under which we typically retain between 65% and 80% of gross billings. Garena also provides access to other entertainment content, such as live streaming of online gameplay, as well as social features, such as user chat and online forums. In addition, Garena is GSEA’s leader in eSports as measured by number of viewers in 2016, according to Newzoo, which strengthens our game ecosystem and increases user engagement. During the second quarter of 2017, we

 



 

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had 64.2 million QAUs, of whom 6.6 million were QPUs. During the month of June 2017, our games had 40.1 million MAUs. In the same month, our games had on average 12.9 million DAUs, each of whom spent an average of 2.3 hours per day playing our games.

 

    Our Shopee e-commerce platform was number one in market share in the first half of 2017 in GSEA by GMV and total orders, according to Frost & Sullivan. Shopee had approximately 2.2 times the number of total orders than our closest competitor in the first half of 2017, an increase from 1.6 times in 2016, according to Frost & Sullivan. In the first half of 2017, we were number one by total orders in Indonesia, Thailand, Vietnam, Taiwan and overall GSEA and number one by GMV in Indonesia, Taiwan and overall GSEA, according to Frost & Sullivan. Since its launch in June 2015, Shopee’s GMV has grown to US$1,150.3 million for 2016 and US$1,469.5 million for the first half of 2017. Due to the region’s growth in smartphone users, Shopee has adopted a mobile-first approach and approximately 93% of orders placed on Shopee in the first half of 2017 were placed through its mobile application. Shopee is a highly scalable third-party marketplace that does not hold inventory and connects buyers and sellers quickly and efficiently. Shopee buyers choose our platform because we are a trusted brand and provide easy access to a wide range of products coupled with strong customer service. Shopee sellers choose our platform because we provide an efficient and reliable way to manage the selling process while maximizing customer reach. We provide our users with a safe and trusted shopping environment that is supported by integrated payment and third-party logistics capabilities. During the second quarter of 2017, Shopee had on average 9.8 million MAUs. During the same period, we had 4.2 million average monthly active buyers, who had an average monthly order frequency of 3.7 orders. We also had 1.6 million average monthly active sellers during the same period and approximately 74 million active product listings as of June 30, 2017. We began monetizing our e-commerce business in 2017 in Taiwan and Indonesia by offering sellers a cost-per-click advertising service to feature and promote their products in search results generated by Shopee buyers, and by charging sellers in Taiwan commission fees for transactions completed on Shopee.

 

    Our AirPay platform provides digital financial services and was the number one digital payments provider in GSEA in the first half of 2017 by e-wallet GTV, according to IDC. Through our AirPay e-wallet, consumers use either our AirPay App or one of our 177.9 thousand registered partner-operated service counters, as of June 30, 2017, to make payments to a wide variety of product and service providers. During 2016, GTV and transactions for AirPay e-wallet totaled US$501.2 million and 133.6 million, respectively, and in the first half of 2017, US$472.4 million and 87.1 million, respectively. The AirPay App is available in Thailand, Vietnam and Taiwan, and AirPay counters are operating in Thailand, Vietnam, Indonesia and the Philippines. We expect to expand our AirPay services to other GSEA markets in the future. We have also begun to integrate our AirPay platform with our Garena and Shopee platforms. For example, during the month of June 2017, AirPay processed approximately 40% of the aggregate gross billings for our Garena digital entertainment business across AirPay’s three largest markets, namely Thailand, Vietnam and Indonesia, which has helped us reduce our payment channel costs. In addition, AirPay also supports Shopee in providing Shopee Guarantee services to buyers and sellers in the markets in which it operates.

Each of our platforms provides a distinct and compelling value proposition to our users, and each also exhibits strong virtuous cycle dynamics, which we believe supports our leadership position and provides a strong foundation for continued growth while creating barriers to entry for our competitors. See “Our Market Opportunity” for a detailed discussion.

 



 

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Our scale, regional breadth and substantial home court advantage provide a strong foundation on which we are able to rapidly scale new businesses. Our digital entertainment business grew its revenue at a 45.4% compounded annual growth rate, or CAGR, from 2014 to 2016. Our AirPay platform, which we launched in early 2014, has grown its e-wallet GTV at a 26.1% compounded quarterly growth rate, or CQGR, from the first quarter of 2015 to the second quarter of 2017. Our Shopee platform, which we launched in mid-2015, has grown its GMV at a 81.0% CQGR from the third quarter of 2015 to the second quarter of 2017.

We curate and localize the content and services on our platforms to serve a highly diverse population across multiple markets and regulatory regimes. We believe our local knowledge, presence and focus provide us with a home court advantage in addressing the specific and unique opportunities and challenges in our region. Our platforms are operated by our local entities held or controlled by Sea Limited, which is a holding company without substantive operations. As of June 30, 2017, we had approximately 5,400 employees across the region, including over 1,240 in Indonesia, 540 in Taiwan, 1,040 in Vietnam and 1,070 in Thailand. We have a network of on-the-ground partners comprising approximately 196.1 thousand physical locations functioning as AirPay counters, cybercafés or both, and 12 data centers, as of June 30, 2017. This home court advantage is a key factor to our success as well as a significant barrier to entry against international competitors and single-market local players.

We have forged long-term collaborative relationships with global industry leaders as well as local partners that have supported our success and growth. Tencent Holdings Limited and its affiliates, or Tencent, is one of our key game developer-partners and also a shareholder. This long-term relationship is based on aligned interests, and allows us to benefit from Tencent’s wealth of experience as a leading global industry player. In addition, many of GSEA’s most respected and established family investors and sovereign wealth funds are our shareholders.

We have achieved significant scale and growth since our founding. Our total revenue increased from US$160.8 million in 2014 to US$345.7 million in 2016, a CAGR of 46.6%. Our total revenue increased by 17.3% from US$166.7 million in the six months ended June 30, 2016 to US$195.5 million in the same period in 2017. As our business grew, our gross profit increased from US$36.2 million in 2014 to US$113.1 million in 2016, a CAGR of 76.8%. Our gross profit decreased by 5.5% from US$56.0 million in the six months ended June 30, 2016 to US$52.9 million in the same period in 2017. We incurred net losses of US$90.9 million, US$107.3 million, and US$225.0 million in 2014, 2015, and 2016, respectively, and US$87.1 million and US$165.2 million in the six months ended June 30, 2016 and 2017, respectively, due to our investments in expanding our businesses, in particular our e-commerce business.

Our Market Opportunity

Our three key businesses of digital entertainment, e-commerce and digital financial services operate in market segments with substantial size and growth potential in GSEA. The GSEA online game market was US$3.5 billion in 2016 and is forecasted to grow at a CAGR of 19.6% to US$8.6 billion in 2021, according to Newzoo and Niko Partners. The GSEA e-commerce market was US$23.0 billion in 2016 and is forecasted to grow at a 29.2% CAGR to US$82.8 billion in 2021, according to Frost & Sullivan. Finally, GSEA total e-wallet payment volume was US$6.5 billion in 2016 and is forecasted to grow at a 30.1% CAGR to US$24.4 billion in 2021, according to IDC.

 



 

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There are multiple thematic drivers of our growth. The drivers are broadly similar across each of our three key businesses and fall into three main categories:

 

    robust demographic and macroeconomic growth in GSEA, including a large and rapidly growing population, a rapidly rising regional GDP per capita, and one of the world’s largest millennial populations;

 

    technology adoption trends in GSEA, including rapid growth in internet access, particularly mobile users on smartphones; and

 

    the digital transformation of GSEA’s industries, including the role of technology changing consumer behavior and enabling new consumer categories such as eSports and mobile e-commerce, network effects and virtuous cycles driving growth and creating barriers to entry, and the increasing adoption of technology by small businesses.

For our digital entertainment business, we believe that entertainment in GSEA, both its forms and how it is distributed, is changing dramatically. Due to the combination of a young population, rising living standards, and historically underpenetrated traditional media, many of our consumers are leapfrogging directly to online forms of entertainment using both mobile and PC internet. Within online entertainment in GSEA, the majority of spending is expected to be interactive content, in the form of mobile and PC online games as opposed to online video and audio, according to Frost & Sullivan. Additional drivers for GSEA’s online game industry include the rising number of game players and, in particular, paying game players; the growth of mobile games as a complement to PC online games; the increasing preference of consumers and game developers for integrated ecosystems; the importance of long-term game franchises; and the rise of eSports.

For our e-commerce business, we believe that the growth of online retail in GSEA will be driven by the affordability of smartphones, growth in the number of online shoppers, underdeveloped offline retail driving a leapfrogging to e-commerce, offline merchants embracing e-commerce, and improving and expanding payments infrastructure.

For our digital financial services business, a distinguishing characteristic of GSEA compared to the United States is the substantially lower percentage of the population with bank accounts, credit cards, or debit cards. This creates the need for alternative payment methods, specifically e-wallets. GSEA is poised for its own payments transformation in much the same way that China has shifted to online payments, according to IDC. Online payments in GSEA is divided into four broad payment modes: e-wallets, such as our AirPay platform, credit cards, debit cards and online banking. Of these, the e-wallet mode is expected to grow the fastest over the next five years, according to IDC. Drivers for GSEA’s e-wallet industry include the mismatch between internet penetration and banking penetration, which creates a structural opportunity for e-wallets; the increasing integration of e-wallets with use cases such as online games and e-commerce; and the opportunity to offer broader digital financial services using e-wallets as a foundation.

Our Strengths

We believe that the following strengths contribute to our success and set us apart from our peers:

 

    our large scale across GSEA;

 

    our frequent and immersive user engagement;

 

    our home court advantage enables us to innovate to address the need of our diverse region;

 



 

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    our pan-GSEA breadth accelerates the growth of new business;

 

    our close alignment with key customer trends;

 

    our business models are highly scalable and capital efficient;

 

    our technology development capabilities and proprietary infrastructure;

 

    our strong capabilities to derive insights from data;

 

    our ability to forge strategic partnerships; and

 

    our entrepreneurial culture and diverse workforce led by experienced management.

Our Strategies

We intend to pursue the following strategies to further grow our business:

 

    increase our user base to deepen our market penetration;

 

    further expand our offerings to increase user engagement and loyalty;

 

    further monetize our active user base;

 

    develop an AirPay e-wallet ecosystem;

 

    accelerate the natural linkages among our platforms;

 

    continue to deepen long-term relationships with our partners; and

 

    pursue strategic investment and acquisition opportunities.

Our Challenges

We believe some of the major risks and uncertainties that may materially and adversely affect us include the following:

 

    we may fail to maintain or grow the size of our user base or the level of engagement of our users;

 

    we may fail to monetize our business effectively;

 

    we have a history of net losses and we may not achieve profitability in the future;

 

    we derive a significant portion of revenue from online games;

 

    we may be unable to achieve the expected linkages among our three platforms;

 

    we may not succeed in managing or expanding our business across the expansive and diverse markets that we operate in; and

 

    we may fail to compete effectively in the markets in which we operate.

In addition, we face risks and uncertainties related to our compliance with applicable regulations and policies in our principal markets and operations, particularly those risks and uncertainties associated with our control over the variable interest entities, or VIEs, and their subsidiaries based on contractual and other arrangements rather than direct equity ownership in Taiwan and Vietnam, as well as our ownership structure in Thailand.

 



 

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See “Risk Factors” and other information included in this prospectus for a detailed discussion of the above and other challenges and risks.

Corporate History and Structure

On May 8, 2009, we incorporated Garena Interactive Holding Limited, our holding company, as a limited liability company in the Cayman Islands. On April 8, 2017, we changed our company name from Garena Interactive Holding Limited to Sea Limited.

We began our digital entertainment business at our inception in May 2009, and by September 2012, we had expanded the business to cover all of GSEA, including Indonesia, Taiwan, Vietnam, Thailand, the Philippines, Malaysia and Singapore.

We launched our e-commerce platform, Shopee, in all seven markets in GSEA in June and early July 2015.

We launched our digital financial services platform, AirPay, in Vietnam in April 2014. The AirPay App is available in Thailand, Vietnam and Taiwan, and AirPay counters are operating in Thailand, Vietnam, Indonesia and the Philippines.

Sea Limited is a holding company that does not have substantive operations. We conduct our businesses in GSEA through our subsidiaries and VIEs and their subsidiaries, or consolidated affiliated entities. The laws and regulations in many markets in GSEA, including Taiwan and Vietnam, place restrictions on foreign investment in and ownership of entities engaged in a number of business activities. For a discussion of these restrictions, see “Regulation.” We have entered into contractual arrangements with our VIEs, including four material VIEs established and operating in Taiwan and Vietnam, and their shareholders. These arrangements allow us to exercise effective control over our VIEs, receive substantially all of the economic benefits and absorb the losses of our VIEs, and have an exclusive call option to purchase all or part of the equity interests in and/or assets of our VIEs when and to the extent permitted by the applicable laws. As a result of these contractual arrangements, we are the primary beneficiary of these VIEs and have consolidated their financial results in our consolidated financial statements in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.

As of the date of this prospectus, we conduct our business operations across 60 subsidiaries and 21 consolidated affiliated entities.

 



 

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The chart below summarizes our corporate structure and identifies the principal subsidiaries and consolidated affiliated entities described above as of the date of this prospectus:

 

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  Direct ownership (or effective ownership in the case of our Thai entities)
- - - -   Contractual arrangements. See “Corporate History and Structure—Contractual Arrangements among Our VIEs, Their Shareholders and Us.”
(1)   See “Corporate History and Structure—Thailand Shareholding Structure.”
(2)   For each of these entities, 30% of the equity interest is owned by us through a wholly-owned subsidiary in Singapore, and the remaining 70% equity interest is controlled by us through contractual arrangements.
(3)   Held through a wholly-owned subsidiary in Singapore.

 



 

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Corporate Information

Our principal executive offices are located at 1 Fusionopolis Place, #17-10, Galaxis, Singapore 138522. Our telephone number at this address is +65 6270-8100. Our registered office in the Cayman Islands is at the offices of Maples Corporate Services Limited at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is Cogency Global Inc., located at 10 East 40th Street, 10th Floor, New York, N.Y. 10016.

Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our website is www.seagroup.com. The information contained on our website is not a part of this prospectus.

Implications of Being an Emerging Growth Company

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenue of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.07 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of the ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

Conventions Which Apply to this Prospectus

Unless we indicate otherwise, all share and per share data in this prospectus have given effect to the 1-to-10 share split effected on April 8, 2017, following which each of our previously issued voting and non-voting ordinary shares, seed preferred shares, series A preference shares and series B preference shares was subdivided into ten voting and non-voting ordinary shares, seed preferred shares, series A preference shares and series B preference shares, respectively. In addition, all information in this prospectus reflects no exercise by the underwriters of their option to purchase up to              additional ADSs representing              ordinary shares from us.

Except where the context otherwise requires:

 

    “active buyers” in a given period refer to user accounts that confirmed one or more orders on Shopee in that period, regardless of whether or not the buyer and seller settle the transaction;

 



 

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    “active product listings” at a given point in time refer to the aggregate number of items listed on Shopee that are available for purchase. Beginning in October 2015, if a seller does not log onto Shopee for a certain period of time, which, starting in August 2016 and continuing through to the date of this prospectus, is seven days, all of that seller’s listings will be deactivated;

 

    “active sellers” in a given period refer to seller accounts that had one or more active product listings at any point during that period;

 

    “active users” refer to the number of unique accounts that interacted with our mobile and PC online games, Shopee marketplace or the AirPay App, as applicable, in a particular period. A unique account that plays more than one online game or in more than one market is counted as more than one active user. “DAUs” refer to the aggregate number or active users during the daily period, “MAUs” refer to the aggregate number of active users during the monthly period, and “QAUs” refer to the aggregate number of active users during the quarterly period;

 

    “ADSs” refer to American depositary shares, each of which represents              Class A ordinary shares;

 

    “China” or “PRC” refers to the People’s Republic of China, excluding, for the purpose of this prospectus only, Taiwan, Hong Kong and Macau;

 

    “GSEA” or “Greater Southeast Asia” comprises the seven distinct markets of Indonesia, Taiwan, Vietnam, Thailand, the Philippines, Malaysia and Singapore;

 

    “gross billings” refer to the monetary value of all virtual items sold in our games during a certain period;

 

    “gross merchandise value” or “GMV” refers to the value of orders of products and services on our Shopee marketplace. Our calculation of GMV for our e-commerce platform includes shipping and other charges;

 

    “Gross transaction value” or “GTV” refers to the value of confirmed transactions or payments processed, as the case may be, on our AirPay platform. “E-wallet GTV” refers to the value of confirmed transactions for products and services through our AirPay e-wallet, including our AirPay App and AirPay counters. “Payment processing GTV” refers to the value of payments processed by AirPay other than through AirPay e-wallet. “Total AirPay GTV” refers to the aggregate value of e-wallet GTV and payment processing GTV;

 

    “GSEA online game market size” refers to the aggregated market size based on the GSEA mobile game market size according to Newzoo and the GSEA PC online game market size according to Niko Partners;

 

    “non-voting ordinary shares” refer to our ordinary shares, par value US$0.0005 per share, without voting rights, all of which will be converted into Class A ordinary shares with voting rights immediately prior to the completion of this offering;

 

    “orders” refer to each confirmed order from a transaction between a buyer and a seller for products and services on our e-commerce platform, even if such order includes multiple items, during the specified period, regardless of whether the transaction is settled or if the item is returned;

 

    “paying users” refer to the number of unique accounts through which a payment is made in our online games in a particular period. A unique account through which payments are made in more than one online game or in more than one market is counted as more than one paying user. “MPUs” refer to the aggregate number of paying users during the monthly period, and “QPUs” refer to the aggregate number of paying users during the quarterly period;

 



 

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    “repeat buyer” for a given period refers to any user who (i) is an active buyer during such period and (ii) had at least two orders on our Shopee platform prior to the end of the period;

 

    “shares” or “ordinary shares” refer to our ordinary shares, par value US$0.0005 per share, with voting rights, and immediately prior to and after completion of this offering refer to our Class A and Class B ordinary shares, par value US$0.0005 per share, with voting rights;

 

    “US$,” “U.S. Dollars,” “$” and “dollars” refer to the legal currency of the United States; and

 

    “we,” “us,” “our company,” “our group,” “our” or “Sea” refers to Sea Limited, a Cayman Islands company, its consolidated subsidiaries and its consolidated affiliated entities, including its VIEs and their subsidiaries.

Our reporting and functional currency is the U.S. Dollar. This prospectus contains translations of certain foreign currency amounts into U.S. Dollars for the convenience of the reader. Unless otherwise stated, all translations from Indonesian Rupiah into U.S. Dollars have been made at the rate of IDR13,319 to US$1.00, being the foreign exchange reference rate and the Jakarta interbank spot dollar rate published by Bank Indonesia in effect as of June 30, 2017, all translations of New Taiwan Dollars, Thai Baht and Singapore Dollars into U.S. Dollars have been made at the rates of NT$30.3800 to US$1.00, THB33.9200 to US$1.00 or S$1.3765 to US$1.00, respectively, being the noon buying rates in The City of New York for cable transfers in New Taiwan Dollars, Thai Baht and Singapore Dollars as certified for customs purposes by the Federal Reserve Bank of New York in effect as of June 30, 2017 set forth in the H.10 statistical release of the U.S. Federal Reserve Board for translation into U.S. Dollars, and all translations from Vietnamese Dong into U.S. Dollars have been made at the rate of VND22,431 to US$1.00, being the central rate published by The State Bank of Vietnam in effect as of June 30, 2017. We make no representation that the Indonesian Rupiah, New Taiwan Dollars, Vietnamese Dong, Thai Baht or Singapore Dollars amounts referred to in this prospectus could have been or could be converted into U.S. Dollars, Indonesian Rupiah, New Taiwan Dollars, Vietnamese Dong, Thai Baht or Singapore Dollars as the case may be, at any particular rate or at all. On September 15, 2017, the Jakarta interbank spot dollar rate for Indonesian Rupiah was IDR13,261 to US$1.00, the noon buying rate for New Taiwan Dollars was NT$30.0600 to US$1.00, the central rate for Vietnamese Dong was VND22,441 to US$1.00, the noon buying rate for Thai Baht was THB33.0700 to US$1.00 and the noon buying rate for Singapore Dollars was S$1.3453 to US$1.00, respectively.

 



 

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THE OFFERING

The following assumes that the underwriters will not exercise their option to purchase additional ADSs in the offering, unless otherwise indicated.

 

Offering Price

We expect that the initial public offering price will be between US$                     and US$             per ADS.

 

ADSs Offered by Us

            ADSs (or              ADSs if the underwriters exercise their option to purchase additional ADSs in full).

 

ADSs Outstanding Immediately After This Offering

            ADSs (or              ADSs if the underwriters exercise their option to purchase additional ADSs in full).

 

Ordinary Shares Outstanding Immediately After This Offering

We will adopt a dual-class voting structure immediately prior to the completion of this offering.              ordinary shares, consisting of              Class A ordinary shares and              Class B ordinary shares (or              ordinary shares if the underwriters exercise their option in full to purchase the additional ADSs, consisting of              Class A ordinary shares and              Class B ordinary shares) will be issued and outstanding immediately after the completion of this offering. Class B ordinary shares issued and outstanding immediately after the completion of this offering will represent             % of our total issued and outstanding shares and             % of the then total voting power (or             % of our total issued and outstanding shares and             % of the then total voting power if the underwriters exercise their option in full to purchase the additional ADSs).

 

New York Stock Exchange symbol

SE.

 

The ADSs

Each ADS represents              Class A ordinary shares.

 

  The depositary will hold the Class A ordinary shares underlying your ADSs and you will have rights as provided in the deposit agreement.

 

  We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our Class A ordinary shares, after deducting its fees and expenses.

 



 

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  You may turn in your ADSs to the depositary in exchange for Class A ordinary shares. The depositary will charge you fees for any exchange. We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs, you agree to be bound by the deposit agreement as amended.

 

  To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

Ordinary Shares

Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering. Holders of Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights and certain approval rights. In respect of matters requiring a shareholders’ vote, each Class A ordinary share will be entitled to one vote, and each Class B ordinary share will be entitled to three votes. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, subject to certain restrictions agreed upon in an irrevocable proxy between our founder, Forrest Xiaodong Li, and Tencent. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of ownership in Class B ordinary shares by a holder to any person or entity which is not a permitted transferee, such Class B ordinary shares will automatically convert into an equal number of Class A ordinary shares without any actions on the part of the transferor or the transferee. For a description of Class A ordinary shares and Class B ordinary shares, see “Description of Share Capital.”

 

Option to Purchase Additional ADSs

We have granted to the underwriters an option, exercisable within 30 days from the date of this prospectus, to purchase up to              additional ADSs.

 

Use of Proceeds

We estimate that we will receive net proceeds of approximately US$             million from this

 



 

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offering (or US$             million if the underwriters exercise their option to purchase additional ADSs in full), after deducting underwriting discounts and commissions and estimated offering expenses payable by us and assuming an initial public offering price of US$             per ADS, being the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus.

 

  We plan to use the net proceeds of this offering primarily for the following purposes:

 

    US$             million for growing our business, including user acquisition, content procurement and research and development; and

 

    the remainder for working capital and other general corporate purposes.

 

  See “Use of Proceeds” for additional information.

 

Lock-up

We, our directors and executive officers, our existing shareholders, and holders of our convertible promissory notes have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or otherwise dispose of any ADSs, ordinary shares or similar securities or any securities convertible into or exchangeable or exercisable for our ordinary shares or ADSs, for a period ending 180 days after the date of this prospectus. See “Underwriting” for more information.

 

Risk Factors

See “Risk Factors” and other information included in this prospectus for a discussion of risks you should carefully consider before investing in the ADSs.

 

Depositary

The Bank of New York Mellon.

The number of ordinary shares to be issued and outstanding after this offering excludes up to              Class A ordinary shares issuable upon conversion of outstanding convertible promissory notes in the aggregate principal amount of US$675 million after this offering at a conversion price ranging from US$         to US$        , which assumes an initial public offering price of US$         per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus. See “Description of Share Capital—History of Securities Issuances—Convertible Promissory Notes.”

 



 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated statements of operations data for the years ended December 31, 2014, 2015 and 2016 and summary consolidated balance sheet data as of December 31, 2014, 2015 and 2016 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. The summary consolidated statements of operations data for the six months ended June 30, 2016 and 2017 and summary consolidated balance sheet data as of June 30, 2017 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, that we consider necessary for a fair statement of our financial position and operating results for the periods presented. Our historical results are not necessarily indicative of results expected for future periods. You should read this “Summary Consolidated Financial Data” section together with our consolidated financial statements and the related notes and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section included elsewhere in this prospectus.

 

    For the Year Ended December 31,     For the Six Months
Ended June 30,
 
    2014     2015     2016         2016             2017      
                      (unaudited)  
    (US$ thousands, except for share and per share data)  

Summary Consolidated Statements of Operations Data:

         

Revenue:

         

Digital entertainment

    155,075       281,963       327,985       159,400       179,045  

Others

    5,681       10,161       17,685       7,286       16,447  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    160,756       292,124       345,670       166,686       195,492  

Cost of revenue:

         

Digital entertainment

    (113,745     (160,267     (185,314     (91,520     (102,169

Others

    (10,828     (24,031     (47,284     (19,152     (40,375
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    (124,573     (184,298     (232,598     (110,672     (142,544
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    36,183       107,826       113,072       56,014       52,948  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (expenses):

         

Other operating income

    742       3,063       2,103       1,321       381  

Sales and marketing expenses

    (68,787     (89,015     (187,372     (74,079     (137,985

General and administrative expenses

    (44,964     (87,202     (112,383     (43,145     (52,852

Research and development expenses

    (11,053     (17,732     (20,809     (9,432     (12,991
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (124,062     (190,886     (318,461     (125,335     (203,447
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (87,879     (83,060     (205,389     (69,321     (150,499

Interest income

    217       545       741       286       473  

Interest expense

    (181     (32     (23     (9     (8,997

Investment gain (loss), net

                9,434       (484     (359

Foreign exchange gain (loss)

    365       (4,911     (1,649     (2,568     (789
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 



 

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    For the Year Ended December 31,     For the Six
Months Ended
June 30,
 
    2014     2015     2016         2016             2017      
                      (unaudited)  
    (US$ thousands, except for share and per share data)  

Loss before income tax and share of results of equity investees

    (87,478     (87,458     (196,886     (72,096     (160,171

Income tax expense

    (2,521     (11,730     (8,546     (6,071     (4,162

Share of results of equity investees

    (880     (8,148     (19,523     (8,960     (862
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (90,879     (107,336     (224,955     (87,127     (165,195

Net loss attributable to the non-controlling interests

    2,496       3,970       2,088       1,428       51  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Sea Limited’s ordinary shareholders

    (88,383     (103,366     (222,867     (85,699     (165,144
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss per share:

         

Basic and diluted

    (0.67     (0.63     (1.30     (0.50     (0.94

Shares used in loss per share computation:

         

Basic and diluted

    131,744,413       164,625,286       171,127,788       170,680,188       174,988,779  

Pro-forma loss per share (unaudited):

         

Basic and diluted

        (0.87     (0.34)       (0.63

Pro-forma weighted average number of ordinary shares outstanding (unaudited)(1):

         

Basic and diluted

        257,463,818       254,940,808       261,324,809  

Non-GAAP Financial Measures:

         

Adjusted net loss(2)

    (86,831     (86,772     (196,114     (73,917     (153,834

 

(1) Includes voting and non-voting ordinary shares.
(2) To see how we define and calculate adjusted net loss, a reconciliation between adjusted net loss and net loss (the most directly comparable U.S. GAAP financial measure) and a discussion about the limitations of non-GAAP financial measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

 



 

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     As of December 31,     As of
June 30,
 
     2014     2015      2016     2017  
                        (unaudited)  
     (US$ thousands)  

Summary Consolidated Balance Sheet Data:

         

Total current assets

     156,061       229,695        309,884       868,241  

Cash and cash equivalents

     85,996       116,203        170,078       651,060  

Prepaid expenses and other assets

     34,021       52,458        79,443       128,705  

Total non-current assets

     124,006       200,175        175,891       195,984  

Intangible assets, net

     29,367       50,857        29,963       24,260  

Long-term investments

     11,334       41,410        45,072       45,070  

Prepaid expenses and other assets

     25,462       39,465        32,299       47,027  

Deferred tax assets

     31,858       33,374        35,295       40,307  

Total assets

     280,067       429,870        485,775       1,064,225  

Total current liabilities

     208,907       244,345        263,756       333,754  

Accrued expenses and other payables

     29,716       42,147        102,086       140,647  

Advances from customers

     9,355       17,564        15,459       19,280  

Deferred revenue

     149,833       162,638        122,218       134,749  

Total non-current liabilities

     89,923       101,327        142,594       804,367  

Deferred revenue

     87,503       89,120        137,259       172,990  

Total liabilities

     298,830       345,672        406,350       1,138,121  

Total mezzanine equity

     10,500       10,500        205,075       205,075  

Total Sea Limited shareholders’ (deficit) equity

     (31,159     71,655        (125,670     (279,005

Total shareholders’ (deficit) equity

     (29,263     73,698        (125,650     (278,971

Total liabilities, mezzanine equity and shareholders’ equity

     280,067       429,870        485,775       1,064,225  

 



 

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RISK FACTORS

An investment in the ADSs involves significant risks. You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in the ADSs. Any of the following risks could have a material and adverse effect on our business, financial condition and results of operations. In any such case, the market price of the ADSs could decline, and you may lose all or part of your investment.

Risks Related to Our Business

We may fail to maintain or grow the size of our user base or the level of engagement of our users.

The size and engagement level of our user base are critical to our success. Our business and financial performance have been and will continue to be significantly determined by our success in adding, retaining, and engaging active users. We continue to invest significant resources to grow our user base and increase user engagement, whether through innovations, providing new or improved content or services, marketing efforts or other means. While our user base has expanded significantly in the last three years, we cannot assure you that our user base and engagement levels will continue growing at satisfactory rates, or at all. Our user growth and engagement could be adversely affected if:

 

    we fail to maintain the popularity of our platforms among users;

 

    we are unable to maintain the quality of our existing content and services;

 

    we are unsuccessful in innovating or introducing new, best-in-class content and services;

 

    we fail to adapt to changes in user preferences, market trends or advancements in technology;

 

    technical or other problems prevent us from delivering our content or services in a timely and reliable manner or otherwise affect the user experience;

 

    there are user concerns related to privacy, safety, fund security or other factors;

 

    our new games may cause players to shift from our existing games without growing the overall size of our user base or online games platform;

 

    there are adverse changes to our platforms that are mandated by, or that we elect to make to address, legislation, regulation, or litigation, including settlements or consent decrees;

 

    we fail to maintain the brand image of our platforms or our reputation is damaged; or

 

    there are unexpected changes to the demographic trends or economic development of GSEA.

Our efforts to avoid or address any of these events could require us to incur substantial expenditure to modify or adapt our content, services or platforms. If we fail to retain or continue growing our user base, or if our users reduce their engagement with our platforms, our business, financial condition and results of operations could be materially and adversely affected.

We may fail to monetize our business effectively.

Our financial performance is largely dependent on our ability to monetize our businesses, and the failure to do so could materially and adversely affect our business, financial condition and our results of operations.

In order to sustain revenue growth for our digital entertainment business, we must convert active game players to paying users and increase their spending. Spending in our games is discretionary and

 

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our users may be price-sensitive, undermining our ability to monetize. It is crucial to balance creating sufficient in-game monetization opportunities on the one hand, and ensuring that our games continue to attract a considerable number of users by offering them an enjoyable free-to-play experience on the other. To stimulate in-game spending, we need to continue to ensure that our games are engaging, the in-game items that we offer are appealing, our prices are attractive and our marketing and promotional activities, such as eSports events, are effective.

Our focus for our e-commerce business has been on building the ecosystem of sellers and buyers and improving the shopping experience. We began monetizing our e-commerce business in 2017 in Taiwan and Indonesia by offering sellers a cost-per-click advertising service to feature and promote their products in search results generated by Shopee buyers, and by charging sellers in Taiwan commission fees for transactions completed on Shopee. However, we cannot be certain that our monetization efforts will be successful. If our efforts to monetize our e-commerce business are not successful, any revenue generated from monetizing our Shopee marketplace may not offset its significant operating costs, causing it to operate with losses for the foreseeable future. Moreover, monetization efforts could increase the costs of using our Shopee platform to users, which could negatively affect the number of users and the level of user engagement on our platform.

We currently monetize our digital financial services business primarily by charging commissions to merchants for transactions on our AirPay platform. Our ability to successfully monetize our digital financial services business in the future will depend significantly on expanding our user base and the number of use cases available, neither of which may be achieved at the level we anticipate. In addition, we are also considering ways to expand our digital financial services platform by offering new services, such as extending small loans to small businesses, which are in their early stages. We cannot assure you that our monetization efforts or our expansion into new services on our digital financial services platform will succeed and generate revenue at levels we expect, or at all.

For all of our businesses, we invest in user data mining and analysis to better understand user consumption patterns. This allows us to introduce content and services that are appealing to our paying users in GSEA on all of our platforms and to properly deploy and price them to enhance our monetization. However, data mining and analysis involves a substantial amount of judgment and discretion. If we fail to properly interpret the data collected from our operations or convert our data mining results into effective business strategies, our monetization may not be successful.

We have a history of net losses and we may not achieve profitability in the future.

We had net losses of US$90.9 million, US$107.3 million, US$225.0 million and US$165.2 million in 2014, 2015 and 2016 and for the six months ended June 30, 2017, respectively. Our net losses in 2014, 2015 and 2016 and for the six months ended June 30, 2017 were primarily due to significant sales and marketing expenses, in particular promotions, which include subsidies for shipping for Shopee users, in order to expand our e-commerce business. In 2014, 2015 and 2016 and for the six months ended June 30, 2017, our sales and marketing expenses equaled 42.8%, 30.5%, 54.2% and 70.6% of our total revenue, respectively. As we seek to monetize the user base and gradually reduce these promotions, we cannot assure you that doing so will not adversely affect user experience, or that our users will not leave our platform. We expect that our operating expenses will continue to increase as we invest in marketing efforts, hire additional local employees, and continue to invest in the development and expansion of our platform, including offering new content and services. These efforts may be more costly than we expect and our revenue may not increase sufficiently to offset these expenses. We may continue to take actions and make investments that do not generate optimal short-term financial results and may even result in increased operating losses in the short term with no assurance that we will eventually achieve the intended long-term benefits or profitability. These factors, among others set out in this “Risk Factors” section, may negatively affect our ability to achieve profitability in the near term, if at all.

 

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We derive a significant portion of revenue from online games.

Substantially all of our revenue is generated from online games in our digital entertainment business as our e-commerce and digital financial services businesses are in their early stages of monetization and currently do not generate significant revenue. In 2014, 2015, 2016 and for the six months ended June 30, 2017, our digital entertainment business contributed 96.5%, 96.5%, 94.9% and 91.6%, of our total revenue, respectively. Among our online games, we are substantially dependent on a small number of games. Our top five games contributed 88.0%, 85.6%, 75.6% and 77.3% of our digital entertainment revenue during 2014, 2015, 2016 and the first half of 2017, respectively. Since a significant portion of our revenue is derived from a small number of games licensed to us by third-party game developers, the expiration or loss of popularity of, or other loss of revenue by, any of our top games could materially and adversely affect our results of operations. See “—We primarily rely upon third-party game developers for the content of our digital entertainment platform” for further information.

We anticipate that as each of our three businesses continues to grow, our sources of revenue will diversify. As we further monetize our e-commerce business and expand our digital financial services business, we expect the revenue generated from those businesses will make us less dependent on revenue from our digital entertainment business. If these additional revenue sources do not develop as we expect them to, or if we are unable to identify, source and launch new game titles that gain widespread popularity and generate significant revenue, our entire business may remain dependent on the success of just a few game titles. If those game titles fail to maintain user engagement or sustain current levels of revenue, or if we fail to successfully introduce updates to extend their commercial lifespan and revenue generation, it would have a material and adverse effect on our business, financial condition and results of operations.

We may be unable to achieve the expected linkages among our three platforms.

We believe there exist strong linkages among our three platforms, whereby the growth of one platform helps drive and accelerate that of the others, leading to a rise in the breadth, depth and interconnectedness of our overall ecosystem. For example, as more of our game players and Shopee buyers complete transactions using our AirPay platform, growth in our digital entertainment and e-commerce platforms will accelerate our digital financial services platform. However, these linkages may not materialize as we expect them to or in a cost-effective manner. Further, where we are able to form linkages, if user activity declines in one of our platforms for any reason, it may also drive a decline in other platforms. In addition, changes we may make to meet the needs and interests of certain members of our ecosystem may have a negative impact upon other members of our ecosystem. If we fail to balance the interests of all participants in our ecosystem, they may stop visiting our platforms, conduct fewer transactions or use alternative platforms, any of which would make our ecosystem less appealing to other participants and could result in a material decrease in our revenue and net income. Any of these scenarios could materially and adversely affect our business, financial condition and results of operations.

We may not succeed in managing or expanding our business across the expansive and diverse markets that we operate in.

Our business has become increasingly complex as we have expanded the number of platforms that we operate, the markets in which we operate and the overall scale of our operations. We have significantly expanded and expect to continue to expand our headcount, office facilities and infrastructure. As our operations continue to expand, our technology infrastructure systems and corporate functions will need to be scaled to support our operations, and if they fail to do so, it could negatively affect our business, financial condition and results of operations.

The markets where we operate are diverse and fragmented, with varying levels of economic and infrastructure development and distinct legal and regulatory systems, and do not operate seamlessly

 

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across borders as a single or common market. Managing our growing businesses across these emerging markets requires considerable management attention and resources. Should we choose to expand into additional markets, these complexities and challenges could further increase. Because each market presents its own unique challenges, the scalability of our business is dependent on our ability to tailor our content and services to this diversity.

Our growing multi-market operations also require certain additional costs, including costs relating to staffing, logistics, intellectual property protection, tariffs and other trade barriers. Moreover, we may become subject to risks associated with:

 

    recruiting and retaining talented and capable management and employees in various markets;

 

    challenges caused by distance, language and cultural differences;

 

    providing content and services that appeal to the tastes and preferences of users in multiple markets;

 

    implementing our businesses in a manner that complies with local laws and practices, which may differ significantly from market to market;

 

    maintaining adequate internal and accounting control across various markets, each with its own accounting principles that must be reconciled to U.S. GAAP upon consolidation;

 

    currency exchange rate fluctuations;

 

    protectionist laws and business practices;

 

    complex local tax regimes;

 

    potential political, economic and social instability; and

 

    higher costs associated with doing business in multiple markets.

Any of the foregoing could negatively affect our business, financial condition and results of operations.

We may fail to compete effectively in the markets in which we operate.

We face competition in each of our business lines and the failure to compete effectively in any of them could materially and adversely affect our business, financial condition and our results of operations.

Our digital entertainment business competes on the basis of a number of factors, including user base, game portfolio, quality of user experience, brand awareness and reputation, relationships with game developers and access to distribution and payment channels. In GSEA, our competitors primarily include companies that with a presence in just one or a few markets in the region, such as VNG in Vietnam. Our competitors may capitalize on their significant financial, technical, or know-how resources to develop, distribute and operate mobile and PC online games. In addition, we face competition from other entertainment formats for the time, attention and entertainment spending of our online game players. If other leisure time activities are perceived by our players to offer greater variety, affordability, interactivity and overall enjoyment, our digital entertainment business may be materially and adversely affected.

Our e-commerce business faces competition principally from regional players that operate across several markets in the region, such as Lazada. We also face competition from single-market players in the region. Global e-commerce companies may also look to expand in GSEA, and they in particular may have greater access to financial, technological and marketing resources than we do. We compete

 

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to attract, engage and retain buyers based on the variety and value of products and services listed on our marketplaces, overall user experience and convenience, online communication tools, integration with mobile and networking applications and tools, mobile applications and availability of payment settlement and logistics services. We also compete to attract and retain sellers based on the number and the engagement of buyers, the effectiveness and value of the marketing services we offer, commission rates and the usefulness of the services we provide including data and analytics for potential buyer targeting, cloud computing services and the availability of support services including payment settlement and logistics services. As e-commerce in GSEA is relatively new, competition for market share is particularly intense. Given the scalability of the e-commerce model, within each market a market leader may be able to achieve the scale and network effect that makes it very difficult for other market players to compete effectively. Our competitors may consolidate or be acquired by other competitors, allowing them to obtain greater market share, gain access to greater resources and gain real advantages over us.

Our digital financial services business faces competition from debit and credit card service providers, banks with payment processing offerings, other offline payment options and other electronic payment system operators, such as Ascend Money, in each of the markets in which we operate. We expect competition to intensify in the future as existing and new competitors introduce new services or enhance existing services. Certain competitors may have longstanding relationships with certain merchants to accept the payment services they offer, which may make it difficult or costly for us to establish partnerships with these merchants. New entrants tied to established brands may engender greater user confidence in the safety and efficacy of their services. We may also face pricing pressures from competitors. Some potential competitors may charge lower commissions to merchants by lowering their own profit margins or subsidize merchants through other services they offer. Such competition may result in the need for us to alter the pricing we offer which could reduce our gross profit.

Future investments or acquisitions may not be successful.

In addition to organic growth, we may take advantage of opportunities to invest in or acquire additional businesses, services, assets or technologies. However, we may fail to select appropriate investment or acquisition targets, or we may not be able to negotiate optimal arrangements, including arrangements to finance any acquisitions. Acquisitions and the subsequent integration of new assets and businesses into our own could require significant management attention and could result in a diversion of resources away from our existing business. Investments and acquisitions could result in the use of substantial amounts of cash, increased leverage, potentially dilutive issuances of equity securities, goodwill impairment charges, amortization expenses for other intangible assets and exposure to potential unknown liabilities of the acquired business, and the invested or acquired assets or businesses may not generate the financial results we expect. Moreover, the costs of identifying and consummating these transactions may be significant. In addition to receiving the necessary corporate governance approvals, we may also need to obtain approvals and licenses from relevant government authorities for the acquisitions to comply with applicable laws and regulations, which could result in increased costs and delays.

We primarily rely upon third-party game developers for the content of our digital entertainment platform.

We license the majority of our online games from third-party game developers. The term of our game license agreements with game developers typically range from three to seven years, renewable upon both parties’ consent. We must continually source new games that are attractive to our game players. However we may not become aware of, or be able to procure on terms acceptable to us, new games that eventually succeed. We may also select and invest significant financial and human

 

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resources in games that later prove unsuccessful. There may also be unforeseen delays in the launch of new games. If we are unable to source or launch new popular games in a timely manner, our game players may seek entertainment elsewhere and our prospects may be materially and adversely affected.

We may also not be able to establish or maintain mutually beneficial commercial relationships with game developers. Our game developer partners may terminate our agreements prior to their expiration if we are not in compliance with the relevant terms or conditions and we fail to remedy such non-compliance in time, or they may refuse to renew the agreements. Even if they are willing to renew the agreements, they may demand commercial terms, such as revenue-sharing ratios, that are less favorable to us. Further, any failure on our part to effectively localize, operate, market or monetize their games, safeguard their intellectual properties, or otherwise perform our obligations under the license agreements may cause substantial harm to our relationships with game developers, who may then choose other game operators to distribute their games.

In certain circumstances, the actions of our third-party game developers which are beyond our control could materially and adversely affect the success of our online games, causing our online games revenue to fluctuate or even be lower than expected. These actions by game developers could include software updates resulting in adverse changes in gameplay which are poorly received by our users, game or update releases with insufficient content to attract users or maintain the level of their engagement, or delays in any release of anticipated games in our pipeline or game updates.

We have a limited operating history.

We have a limited operating history upon which to evaluate the viability and sustainability of our businesses, in particular our e-commerce and digital financial services businesses. Our history of operating all three of our businesses together is relatively short, as our AirPay and Shopee platforms were launched in April 2014 and June 2015, respectively. As these two businesses are expanding rapidly, our historical results may not be indicative of our future performance and you should consider our future prospects in light of the risks and uncertainties of early stage companies operating in fast evolving high-tech industries in emerging markets. Some of these risks and uncertainties relate to our ability to:

 

    retain existing users, attract new users, and increase user engagement and monetization;

 

    maintain growth rates across our platforms in multiple markets;

 

    maintain and expand our network of domestic, regional and global industry value chain partners;

 

    upgrade our technology and infrastructure to support increased traffic and expanded offerings of content and services;

 

    anticipate and adapt to changing user preferences;

 

    implement our strategy to expand our offerings on our e-commerce and digital financial services platforms;

 

    increase awareness of our brand;

 

    adapt to competitive market conditions;

 

    maintain adequate control of our expenses; and

 

    attract and retain qualified personnel.

If we are unsuccessful in addressing any of these risks and uncertainties, our business, financial condition and results of operations may be materially and adversely affected.

 

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We may fail to obtain, maintain or renew the requisite licenses and approvals.

We may not be able to obtain all the licenses and approvals that may be deemed necessary to provide the content and services we plan to offer. Because the industries we operate in are relatively new in our markets, especially the e-commerce and digital financial services businesses, the relevant laws and regulations, as well as their interpretations, are often unclear and evolving. This can make it difficult to know which licenses and approvals are necessary, or the processes for obtaining them. For these same reasons, we also cannot be certain that we will be able to maintain the licenses and approvals that we have previously obtained, or that once they expire we will be able to renew them. We also believe that some of our business operations fall outside the scope of licensing requirements, or benefit from certain exemptions, making it not necessary to obtain certain licenses or approvals. We cannot be sure that our interpretations of the rules and their exemptions have always been or will be consistent with those of the local regulators.

As we expand our businesses, in particular our digital financial services business, we may be required to obtain new licenses and will be subject to additional laws and regulations in the markets we plan to operate in. If we fail to obtain, maintain or renew any required licenses or approvals or make any necessary filings or are found to require licenses or approvals that we believed were not necessary or we were exempted from obtaining, we may be subject to various penalties, such as confiscation of the revenue or assets that were generated through the unlicensed business activities, imposition of fines, suspension or cancelation of the applicable license, written reprimands, termination of third-party arrangements, criminal prosecution and the discontinuation or restriction of our operations. Any such penalties may disrupt our business operations and materially and adversely affect our business, financial condition and results of operations.

We operate platforms that include third parties over whose actions we have no control.

Each of our digital entertainment, e-commerce and digital financial services businesses requires the participation of third parties such as game developers, sellers and merchants who own the content and services offered through our platforms. We cannot control the actions of these third parties and if they do not perform their functions to our satisfaction or the satisfaction of our users, it may damage the reputation of our platform. Our digital entertainment business requires game developers to provide the online games that we offer through our Garena platform, and we cannot be certain that the games, including any revisions or updates, will not be offensive to some of our users or infringe upon the intellectual property rights of other parties. Our e-commerce business relies upon sellers to provide and post their products on our platform, and we cannot be certain that the products that they sell will all be legitimate, of a sufficiently high quality or that they will accurately represent the products in their postings. See “—Claims that items listed on our e-commerce platform are pirated, counterfeit or otherwise inappropriate or illegal could damage our reputation or even result in regulatory actions against us.” Our AirPay e-wallet services rely upon counter operators to accurately process transactions in connection with AirPay counter services and upon merchants to provide quality products and services that our users are willing to purchase. Though we take efforts to carefully screen the games we place on our platform, the listings placed by our Shopee sellers and the payments for products and services that can be settled through our AirPay platform, we cannot be certain that we will detect every improper third-party action before it reaches our users. Further, while we have agreements with each of these parties that obligate them to carry out their respective businesses in a professional manner, any legal protections we might have could be insufficient to compensate us for our losses and would not be able to repair the damage to our reputation.

We rely upon third-party channels in distributing content and services.

We rely upon a number of third-party channels to provide content and services to our users. For example, we primarily rely on third-party application distribution channels, such as the Apple App Store

 

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and the Google Play Store, to allow users to download our applications and games. We depend upon third-party payment service providers to provide users with various payment options, such as payment on delivery, bank transfers, direct carrier billing, credit cards, debit cards and payment through other third-party payment services. For our e-commerce business, we also rely on local logistics service providers to help sellers deliver products to buyers. In each of our businesses, we also rely upon data center providers to store important and valuable data. If any of these third-party channel providers delivers unsatisfactory service, engages in fraudulent actions, or is unable or refuses to continue to provide its services to us and our users for any reason, it may materially and adversely affect our business, financial condition and results of operations.

We may fail to attract, motivate and retain the key members of our management team or other experienced and capable employees.

Our future success is significantly dependent upon the continued service of our executives and other key employees. If we lose the services of any member of management or any key personnel, we may not be able to locate a suitable or qualified replacement and we may incur additional expenses to recruit and train a replacement, which could severely disrupt our business and growth.

To maintain and grow our business, we will need to identify, hire, develop, motivate and retain highly skilled employees. Identifying, recruiting, training, integrating and retaining qualified individuals requires significant time, expense and attention. In addition, from time to time, there may be changes in our management team that may be disruptive to our business. We may also be subject to local hiring restrictions in certain markets, particularly in connection with the hiring of foreign employees, which may affect the flexibility of our management team. If our management team, including any new hires that we make, fail to work together effectively and execute our plans and strategies, or if we are not able to recruit and retain employees effectively, our ability to achieve our strategic objectives will be adversely affected and our business and growth prospects will be harmed.

Competition for highly skilled personnel is intense, particularly in GSEA where our business operations are located. We may need to invest significant amounts of cash and equity to attract and retain new employees and we may not be able to realize returns on these investments.

We face uncertainties relating to the growth and profitability of the e-commerce industry in GSEA and we may face challenges and uncertainties in implementing our e-commerce strategy.

While e-commerce has existed in the GSEA region since the 2000s, only recently have certain regional e-commerce companies become sizeable. Our future results of operations will depend on numerous factors affecting the development of the e-commerce retail industry in GSEA, which may be beyond our control. These factors include:

 

    the growth rate of internet, broadband, personal computer, and smartphone penetration and usage in GSEA;

 

    the trust and confidence level of e-commerce consumers in GSEA, as well as changes in customer demographics and consumer tastes and preferences;

 

    the selection, pricing and popularity of products that online sellers offer;

 

    whether alternative retail channels or business models that better address the needs of consumers emerge in GSEA; and

 

    the development of logistics, payment and other ancillary services associated with e-commerce.

In addition, we will continue to face challenges in the growth of our e-commerce business and profitability related to the expansive and diverse geographic regions we operate in and the need for

 

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substantial improvements in logistics, including last-mile delivery and warehousing infrastructure necessary to fulfill users’ orders. Moreover, the growth of our e-commerce business depends on assumptions about the e-commerce penetration rate and overall growth of the e-commerce market. See “Our Market Opportunity.” To the extent these growth assumptions and forecasts turn out to be incorrect, our business may be materially and adversely affected. Our e-commerce business is currently significantly concentrated, with our top two markets accounting for 86.9% and 84.9% of our e-commerce business in 2016 and the first half of 2017, respectively, as measured by GMV. If we were to experience a material decline in these top markets, it could further challenge the growth and profitability of our e-commerce business.

A decline in the popularity of online shopping in general, or any failure by us to adapt and monetize our Shopee platform and improve the online shopping experience of our users in response to trends and consumer preferences, may adversely affect our revenue and business prospects.

Furthermore, we have observed that for certain goods there has not been a sufficient number of active online sellers to meet the potential demand of buyers. As part of our e-commerce growth strategy, we are exploring the possibility of undertaking limited direct sales activities online with respect to some of those goods. We expect to gradually roll out these activities in the GSEA markets under a separate business line from Shopee. Undertaking online direct sales will require us to market and sell products directly to consumers, manage inventories, and provide delivery and after-sales services. Although we do not expect our initial exploration into direct sales to result in significant transaction volume, we cannot assure you that our new business initiatives will be successful. If we are not able to execute our strategy effectively, our business and prospects may be adversely affected.

Claims that items listed on our e-commerce platform are pirated, counterfeit or otherwise inappropriate or illegal could damage our reputation or even result in regulatory actions against us.

From time to time we receive complaints alleging that items offered on or sold through our Shopee platform infringe third-party copyrights, trademarks and patents or other intellectual property rights, or contain obscene, defamatory or libelous contents. Although we have adopted measures to verify the authenticity of and minimize infringements or offense by product listings on our Shopee platform before they appear on the marketplace, these efforts may not always be successful. Any public perception that counterfeit, pirated, or otherwise inappropriate or illegal items are commonplace on Shopee, even if factually incorrect, or perceived delays in our removal of these items could damage our reputation and result in regulatory action against us and diminish the value of our brand name. Further, we may be subject to allegations of civil or criminal liability based on allegedly unlawful activities carried out by third parties through our Shopee platform. We may also be subject to sanctions by local authorities for infringing products offered on our marketplace, including removal of the infringing products or a temporary or permanent block of our marketplace.

We may implement further measures in an effort to strengthen our efforts to protect users and ourselves against these potential liabilities that could require us to spend substantial additional resources or discontinue certain service offerings. In addition, these measures may reduce the attractiveness of our e-commerce platform to buyers, sellers or other users. A seller whose listings are removed or suspended by us, regardless of our compliance with the applicable laws, rules and regulations, may dispute our actions and commence action against us for damages based on breach of contract or other causes of action or make public complaints or allegations. Any costs incurred as a result of such liability or asserted liability could also harm our business.

 

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An increase in the use of credit and debit cards may result in lower growth or a decline in the use of our e-wallet services.

Due to the underdevelopment of the banking industry in Indonesia, Vietnam and Thailand, where we currently operate our AirPay platform, a significant portion of the population in these markets do not have access to credit or debit cards. For example, as of December 31, 2016, in Indonesia there were 29.7 debit cards and 6.1 credit cards for each 100 people living in Indonesia, while there were only 28.6 debit cards and 8.6 credit cards for every 100 people living in Vietnam, according to IDC. In addition, many may be unwilling to use debit or credit cards for online transactions due to security concerns. Through our AirPay e-wallet, consumers can make payments through AirPay counters or the AirPay App. AirPay counters also facilitate cash top-ups into the AirPay App as a complement to debit card and bank transfer top-ups into e-wallet. However, if the banking industry in GSEA continues to develop and there is a significant increase in the availability, acceptance and use of credit card or debit card for online or offline payments by consumers in GSEA, demand for our e-wallet cash top-up services could decline.

We could be held liable if our digital financial services platform is used for fraudulent, illegal or improper purposes such as money laundering.

Despite measures we have taken and continue to take, our digital financial services platform remains susceptible to potentially illegal or improper uses, which could damage our reputation and subject us to liability. These may include the use of our payment services in connection with fraudulent sales of goods or services, software and other intellectual property piracy, money laundering, bank fraud and prohibited sales of restricted products. Criminals are using increasingly sophisticated methods to engage in illegal activities such as counterfeiting and fraud and incidents of fraud could increase in the future. We could be subject to fraud claims if confidential information obtained from our users is used for unauthorized purposes.

Our risk management policies and procedures may not be fully effective in identifying, monitoring and managing these risks. We are not able to monitor in each case the sources of funds for our digital financial services platform users, or the ways in which they are used. An increase in fraudulent transactions or publicity regarding payment disputes could harm our reputation and reduce consumer confidence in our services.

Our lending business may not ultimately prove successful and will expose us to new business and legal risks.

As a natural extension of our digital financial services platform, we began extending small loans to small businesses in Thailand in June 2016. We cannot be certain that these additional services will generate sufficient revenue to cover the costs and expenses of their launch and development, and offering these additional services may not ultimately be successful for us, and attempting to do so could materially and adversely affect our business, financial condition and results of operations. In addition, these services will also expose us to risks and liabilities, including credit risks relating to the borrowers and counterparty risks in dealing with our bank partners. We believe that our understanding of the business and liquidity situation of our counters and e-commerce sellers will allow us to limit borrower risk to a certain extent, but we cannot be certain that our understanding of these situations will always be accurate. We also cannot be certain that a sufficient number of borrowers will be able to repay the loans we extend to them, or that the interest rates we charge them will be sufficient to cover our costs and expenses in providing the loans, including the costs associated with borrower defaults.

We may fail to maintain or improve our technology infrastructure.

We are constantly upgrading our technology to provide improved performance, increased scale and better integration among our three businesses. Adopting new technologies, upgrading our internet

 

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ecosystem infrastructure, maintaining and improving our technology infrastructure require significant investments of time and resources, including adding new hardware, updating software and recruiting and training new engineering personnel. Adverse consequences for the failure to do so may include unanticipated system disruptions, security breaches, computer virus attacks, slower response times, impaired quality of experiences for our users and delays in reporting accurate operating and financial information. In addition, many of the software and interfaces we use are internally developed and proprietary technology. If we experience problems with the functionality and effectiveness of our software or platforms, or are unable to maintain and constantly improve our technology infrastructure to handle our business needs and ensure a consistent and acceptable level of service for our users, our business, financial condition, results of operation and prospects, as well as our reputation, could be materially and adversely affected.

We may be liable for security breaches and attacks against our platforms and network, particularly with regards to the confidential user information, and our platforms may contain unforeseen “bugs” or errors.

Our business generates and processes a large amount of data, and the improper use or disclosure of such data could harm our reputation. Although we have employed significant resources to develop security measures aimed at preventing breaches, our cybersecurity measures may not detect or prevent all attempts to compromise our systems, including distributed denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in and transmitted by our systems or that we otherwise maintain. Breaches of our cybersecurity measures could result in unauthorized access to our systems, misappropriation of information or data, deletion or modification of user information, or a denial-of-service or other interruption to our business operations. As techniques used to obtain unauthorized access to or otherwise sabotage systems change frequently and may not be known until they have been launched against us or our third-party service providers, we may be unable to anticipate or implement adequate measures to protect against these attacks.

We have in the past and are likely again in the future to be subject to these types of attacks, although to date no such attack has resulted in any material damages or remediation costs. If we are unable to avert these attacks and security breaches, we could be subject to significant legal and financial liability, our reputation would be harmed and we could sustain substantial revenue loss from lost sales and customer dissatisfaction. We may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber-attacks. Cyber-attacks may target us, our game players, sellers, buyers, counter owners or other members of our ecosystem, or the communication infrastructure on which we depend. Actual or anticipated attacks and risks may cause us to incur significantly higher costs, including costs to deploy additional personnel and network protection technology, train employees, and engage third-party experts and consultants. Cybersecurity breaches could not only harm our reputation and business, but also materially decrease our revenue and net income.

Our platforms have in the past contained and may in the future contain errors or “bugs” that are not detected until after the applications are published. Any such errors could impact the overall user experience, which could cause users to reduce their time or interest on our platforms or not recommend our content and services to others. Such errors could also result in non-compliance with applicable laws or create legal liability for us. Resolving such errors could also disrupt our operations, cause us to divert resources from other matters, or harm our operating results.

Our results of operations are subject to fluctuations.

We are subject to seasonality and other fluctuations in our business. Our revenue is also largely affected by our promotional and marketing activities and our revenue may increase as a result of these

 

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activities. We may also introduce new promotions or change the timing of our promotions in ways that would further cause our quarterly results to fluctuate and differ from historical patterns. Our results of operations will likely fluctuate due to these and other factors, some of which are beyond our control. In addition, our rapid growth has masked certain fluctuations that might otherwise be apparent in our results of operations. When our growth stabilizes, the seasonality in our business may become more pronounced.

Our revenue and other operating results may vary significantly from quarter to quarter due to a variety of factors, many of which are outside our control. Factors that may contribute to the fluctuations of our quarterly results include (i) fluctuations in overall consumer demand for mobile and PC online games during certain months and holidays; (ii) timing of game releases and monetization rates of new games and game enhancements in different markets in GSEA; (iii) increases in sales and marketing and other operating expenses that we may incur to grow and expand our businesses; (iv) timing of promotional and marketing activities as described above; and (v) macro-economic conditions and their effect on discretionary consumer spending. Because of these and other factors as well as the short operating history of some of our businesses, it is difficult for us to accurately identify recurring seasonal trends in our business. Accordingly, you should not rely on quarter-to-quarter comparisons of our results of operations included elsewhere in this prospectus as an indication of our future performance.

We may not be able to protect our intellectual property rights.

We rely on a wide portfolio of intellectual property to operate our businesses and we may not be able to effectively protect these intellectual properties against infringement, or efforts to safeguard our intellectual property may be costly.

We rely on a combination of trademark, fair trade practice, copyright and trade secret protection laws in GSEA and other jurisdictions, as well as confidentiality procedures and contractual provisions, to protect our intellectual property rights. We also enter into confidentiality agreements with our employees and any third parties who may access our proprietary information, and we rigorously control access to our proprietary technology and information.

Intellectual property protection may not be sufficient in GSEA or in the other regions in which we operate. Confidentiality agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or the intellectual properties licensed from third parties, or to enforce our contractual rights in GSEA or elsewhere. In addition, policing any unauthorized use of our intellectual property is difficult, time-consuming and costly, and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.

We rely upon the internet infrastructure, data center providers and telecommunications networks in the markets where we operate.

Our business depends on the performance and reliability of the internet infrastructure and contracted data center providers in the markets where we operate. We may not have access to alternative networks or data servers in the event of disruptions or failures of, or other problems with, the relevant internet infrastructure. In addition, the internet infrastructure, especially in the emerging

 

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markets where we operate, may not support the demands associated with continued growth in internet usage.

We use third-party data center providers for the storing of data related to our online game business. We do not control the operation of these facilities and rely on contracted agreements to employ their use. The owners of the data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our data center providers is acquired by another party, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and possible lengthy service interruptions in connection with doing so. Any changes in third-party service levels at our data centers or any errors, defects, disruptions, or other performance problems with our games could adversely affect our reputation and adversely affect the game playing experience. If a particular game is unavailable when players attempt to access it or navigation through a game is slower than they expect, players may stop playing the game and may be less likely to return to the game as often, if at all. Interruptions in our services might reduce our revenue, subject us to potential liability, or adversely affect our renewal rates for our online game business.

We also rely on major telecommunication operators in the markets where we operate to provide us with data communications capacity primarily through local telecommunications lines and data centers to host our servers. We and our users may not have access to alternative services in the event of disruptions or failures of, or other problems with, the fixed telecommunications networks of these telecommunications operators, or if such operators otherwise fail to provide such services. Any unscheduled service interruption could disrupt our operations, damage our reputation and result in a decrease in our revenue. Furthermore, we have no control over the costs of the services provided by the telecommunications operators to us and our users. If the prices that we pay for telecommunications and internet services rise significantly, our gross margins could be significantly reduced. In addition, if internet access fees or other charges to internet users increase, our user traffic may decrease, which in turn may cause our revenue to decline.

We are subject to extensive government regulation across our business.

Our business is impacted by laws and regulations across multiple jurisdictions that affect the industries our businesses operate in, and their scope has increased significantly in recent years. We are subject to a variety of regulations, including those relating to game operations, game ratings, e-commerce, social networking, privacy and data protection, live-streaming services, labor laws, national language requirements, intellectual property, virtual items, national security, content restrictions, consumer protection, prevention of money laundering and financing criminal activity and terrorism, digital financial services regulation, electronic payment services regulation and currency control regulation. Furthermore, these laws and regulations vary significantly from jurisdiction to jurisdiction and are often evolving, unclear or inconsistent with other applicable laws. Future expansion in terms of services and geographic coverage could subject us to additional regulatory requirements and other risks that may be costly or difficult to comply with. This may require us to expend substantial resources, which would harm our business, financial condition and results of operations.

We receive, store and process personal information and other data in all of our three businesses. The regulatory frameworks for privacy issues vary worldwide and are likely to continue to do so for the foreseeable future. It is possible that obligations imposed under applicable laws may be interpreted and applied in a manner that is inconsistent between jurisdictions and may conflict with other rules or our practices. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to our users or other third parties, or applicable privacy laws, or any compromise of security that results in the unauthorized release or transfer of information or other data, may result in

 

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governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause our users to lose trust in us, which could have an adverse effect on our business. Furthermore, if third parties that we work with, such as individual users, game developers, Shopee sellers, payment gateway partners, counter owners and logistics service providers, violate applicable laws or our policies, such violations may put our user information at risk and could have an adverse effect on our reputation and business.

We may not achieve the intended tax efficiencies of our corporate structure and intercompany arrangements, which could increase our worldwide effective tax rate.

Our corporate structure and intercompany arrangements, including the manner in which we conduct our intercompany and related party transactions, are intended to provide us with worldwide tax efficiencies. The application of tax laws of various jurisdictions to our business activities is subject to interpretation and also depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The tax authorities of jurisdictions where we operate may challenge our methodologies for intercompany and related party arrangements, including transfer pricing, or determine that the manner in which we operate does not achieve the intended tax consequences, which could increase our worldwide effective tax rate and adversely affect our financial position and results of operations.

A certain degree of judgment is required in evaluating our tax positions and determining our provision for income taxes. In the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rate could be adversely affected by lower than anticipated earnings in markets where we have lower statutory rates and higher than anticipated earnings in markets where we have higher statutory rates, by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. Any of these factors could materially and adversely affect our financial position and results of operations.

We face risks in connection with our strategic partnerships.

We seek to establish strategic partnerships to expand and grow our business. If we are unable to maintain our relationships with any of our existing or future strategic partners, our business, financial condition and results of operations may be materially and adversely affected.

For example, two of our most popular games, League of Legends and Arena of Valor, are owned by Tencent, which beneficially owns approximately 39.7% of our outstanding equity interest as of June 30, 2017. We believe we have maintained a strong relationship with Tencent, which reinforces our long-term relationship based on aligned interests, and allows us to benefit from their wealth of experience as a leading global industry player. However, we cannot assure you that we will always be able to maintain such good relationship in the future. If our relationship with Tencent deteriorates, our business, financial condition and results of operations could be materially and adversely affected.

Strategic partnerships could also subject us to a number of other risks, including risks associated with sharing proprietary information and non-performance by third-party strategic partners. Likewise, we may have a limited ability to monitor or control the actions of our strategic partners and, to the extent any such strategic partner suffers negative publicity or harm to its reputation for any reason, we may also suffer harm to our reputation by association.

 

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Industry data, projections and estimates contained in this prospectus are inherently uncertain and subject to interpretation. Accordingly, you should not place undue reliance on such information.

Certain facts, forecasts and other statistics relating to the industries in which we compete in contained in this prospectus have been derived from various public data sources and commissioned third-party industry reports. In connection with this offering, we commissioned certain industry experts to provide information on the market size and growth projections. In particular, we commissioned Niko Partners to conduct market research concerning the PC online game market in GSEA, Newzoo to conduct market research concerning the mobile game market in GSEA, and Frost & Sullivan to conduct market research concerning the e-commerce market in GSEA. We were also granted permission by IDC to use its market research concerning the online payments market in GSEA. In deriving the market size of the aforementioned industries, these industry consultants may have adopted different assumptions and estimates, such as the number of internet users. While we generally believe such reports to be reliable, we have not independently verified the accuracy or completeness of such information. Such reports may not be prepared on a comparable basis or may not be consistent with other sources.

Industry data, projections and estimates are subject to inherent uncertainty as they necessarily require certain assumptions and judgments. Moreover, geographic markets and the industries we operate in are not rigidly defined or subject to standard definitions, and are the result of subjective interpretation. Accordingly, our use of the terms referring to our geographic markets and industries such as, digital entertainment, e-commerce and digital financial services or e-wallet markets may be subject to interpretation, and the resulting industry data, projections and estimates may not be reliable. In addition, we define the “Greater Southeast Asia” region, or GSEA, as the six major markets in the Southeast Asia region, namely Indonesia, Vietnam, Thailand, the Philippines, Malaysia and Singapore, in addition to Taiwan. Our industry data and market share data should be interpreted in light of the defined geographic markets and defined industries we operate in. Any discrepancy in the interpretation thereof could lead to different industry data, measurements, projections and estimates and result in errors and inaccuracies. For these reasons, you should not place undue reliance on such information as a basis for making your investment decision.

Our user metrics and other estimates are subject to inherent challenges in measuring our operating performance.

We regularly review metrics, including our DAUs, MAUs, QAUs, MPUs, QPUs, GMVs, orders, active buyers, active sellers, repeat buyers, GTV and number of transactions, to evaluate growth trends, measure our performance, and make strategic decisions. These metrics are calculated using internal company data and have not been validated by an independent third party. While these numbers are based on what we believe to be reasonable estimates for the applicable period of measurement, there are inherent challenges in measuring how our platforms are used across large populations throughout GSEA. For example, we believe that we cannot distinguish individual users who have multiple accounts. Our user metrics are also affected by technology on certain mobile devices that automatically runs in the background of our applications when another phone function is used, and this activity can cause our system to miscount the user metrics associated with such accounts.

Errors or inaccuracies in our metrics or data could result in incorrect business decisions and inefficiencies. For instance, if a significant understatement or overstatement of active users were to occur, we may expend resources to implement unnecessary business measures or fail to take required actions to remedy an unfavorable trend. If partners or investors do not perceive our user, geographic, or other operating metrics to accurately represent our user base, or if we discover material

 

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inaccuracies in our user, geographic, or other operating metrics, our reputation may be seriously harmed.

A material weakness in our internal control over financial reporting has been identified, and if we fail to implement and maintain effective internal control over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.

Prior to this offering, we were a private company with limited accounting personnel and other resources to address our internal control over financial reporting and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In connection with the audit of our consolidated financial statements for the years ended December 31, 2014, 2015 and 2016, we and our independent registered public accounting firm identified one material weakness as of December 31, 2016, in accordance with the standards established by the Public Company Accounting Oversight Board of the United States, or PCAOB.

The material weakness identified relates to our insufficient accounting resources and processes necessary to comply with the reporting and compliance requirements of U.S. GAAP and the SEC. We plan to adopt several measures that will improve our internal control over financial reporting. For details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.” However, we cannot assure you that we will be able to continue implementing these measures in the future, or that we will not identify additional material weaknesses or significant deficiencies in the future.

We will be a public company in the United States subject to the Sarbanes-Oxley Act of 2002 after the completion of this offering. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2018. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, which may be up to five full fiscal years following the date of this offering, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial

 

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information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions.

We may need additional capital but may not be able to obtain it on favorable terms or at all.

We may require additional cash capital resources in order to fund future growth and the development of our businesses, including expansion of our e-commerce and digital financial services businesses and any investments or acquisitions we may decide to pursue. If our cash resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain new or expanded credit facilities. Our ability to obtain external financing in the future is subject to a variety of uncertainties, including our future financial condition, results of operations, cash flows, share price performance, liquidity of international capital and lending markets, governmental regulations over foreign investment and the digital entertainment, e-commerce and digital financial services industries in GSEA. In addition, incurring indebtedness would subject us to increased debt service obligations and could result in operating and financing covenants that would restrict our operations. There can be no assurance that financing will be available in a timely manner or in amounts or on terms acceptable to us, or at all. Any failure to raise needed funds on terms favorable to us, or at all, could severely restrict our liquidity as well as have a material adverse effect on our business, financial condition and results of operations. Moreover, any issuance of equity or equity-linked securities could result in significant dilution to our existing shareholders.

We have limited business insurance coverage.

Insurance products available in GSEA currently are not as extensive as those offered in more developed regions. Consistent with customary industry practice in GSEA, our business insurance is limited and we do not carry business interruption insurance to cover our operations. We have determined that the costs of insuring for related risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured damage to our platforms, technology infrastructures or disruption of our business operations could require us to incur substantial costs and divert our resources, which could have an adverse effect on our business, financial condition and results of operations.

We are subject to risks related to litigation, including intellectual property claims, consumer protection actions and regulatory disputes.

We may be, and in some instances have been, subject to claims, lawsuits (including class actions and individual lawsuits), government investigations, and other proceedings relating to intellectual property, consumer protection, privacy, labor and employment, import and export practices, competition, securities, tax, marketing and communications practices, commercial disputes, and other matters. The number and significance of our legal disputes and inquiries have increased as we have grown larger, as our business has expanded in scope and geographic reach, and as our services have increased in complexity.

Moreover, becoming a public company will raise our public profile, which may result in increased litigation as well as increased public awareness of any such litigation. There is substantial uncertainty regarding the scope and application of many of the laws and regulations to which we are subject, which increases the risk that we will be subject to claims alleging violations of those laws and regulations. In the future, we may also be accused of having, or be found to have, infringed or violated third-party intellectual property rights.

 

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Regardless of the outcome, legal proceedings can have a material and adverse impact on us due to their costs, diversion of our resources, and other factors. We may decide to settle legal disputes on terms that are unfavorable to us. Furthermore, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that we may not choose to appeal or that may not be reversed upon appeal. We may have to seek a license to continue practices found to be in violation of a third party’s rights. If we are required, or choose to enter into, royalty or licensing arrangements, such arrangements may not be available on reasonable terms, or at all, and may significantly increase our operating costs and expenses. As a result, we may also be required to develop or procure alternative non-infringing technology or discontinue the use of technology, and doing so could require significant effort and expense, or may not be feasible. In addition, the terms of any settlement or judgment in connection with any legal claims, lawsuits, or proceedings may require us to cease some or all of our operations, or pay substantial amounts to the other party and could materially and adversely affect our business, financial condition and results of operations.

The occurrence of a natural disaster, widespread health epidemic or other outbreaks.

Our business could be adversely affected by severe weather conditions and natural disasters or the outbreak of avian influenza, severe acute respiratory syndrome, the influenza A (H1N1), H7N9 or another epidemic. Any of such occurrences could cause severe disruption to our daily operations, and may even require a temporary closure of our operations across one or more markets. Such closures may disrupt our business operations and adversely affect our business, financial condition and results of operations. Our operations could also be disrupted if our third-party service providers, business partners or a significant portion of our users were affected by such natural disasters or health epidemics.

Risks Related to Our Corporate Structure

We rely upon structural arrangements to establish control over certain entities and government authorities may determine that these arrangements do not comply with existing laws and regulations.

The laws and regulations in many markets in GSEA, including Taiwan, Vietnam and Thailand, place restrictions on foreign investment in and ownership of entities engaged in a number of business activities.

For example, in Taiwan, PRC investors are prohibited from investing in companies that operate business in statutory business categories that are not listed as permitted in the Positive Listings promulgated by Taiwan authorities. Further, prior approval is required for PRC investors to invest in companies that operate business in statutory business categories listed as permitted in the Positive Listings. We do not believe, based on advice from our Taiwan counsel, LCS & Partners, that we are a PRC investor under existing Taiwan law and court judgments. However, we cannot be certain that Taiwan authorities will not take a different view, and cannot rule out the possibility that the Taiwan authorities will take action nor anticipate the outcome of such actions. For more information regarding the restrictions on PRC-related investments in Taiwan and the definition of “PRC investors,” see “—Risks Related to Doing Business in Greater Southeast Asia—Our businesses and operations in Taiwan may be materially and adversely impacted if we are deemed to be a PRC investor or if our VIE arrangements in Taiwan are deemed to be invalid or unenforceable or not in compliance with Taiwan laws.” If we were deemed to be a PRC investor, we would be prohibited from investing in or controlling our Taiwan operating entities because our businesses in Taiwan operate business in statutory business categories that are not listed as permitted in the Positive Listings, including computer recreational activities, software publication, third party payments and general advertising services. In Vietnam, foreign ownership in companies engaging in the online game business may not exceed 49%,

 

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and foreign ownership in companies engaging in e-payment business is restricted unless certain government approvals are obtained. In Thailand, direct foreign ownership of each entity operating restricted businesses under, among others, the Thai Foreign Business Act B.E. 2542 (1999), or Thai Foreign Business Act, must be less than 50%.

To comply with the relevant laws and regulations, we conduct our business activities in Taiwan and our digital entertainment and e-payment businesses in Vietnam through our VIEs and their subsidiaries. We refer to these jurisdictions as VIE jurisdictions. We and certain of our wholly-owned subsidiaries in the Cayman Islands and Singapore have entered into a series of contractual arrangements with our VIEs and their shareholders in the VIE jurisdictions, which enable us to (i) exercise effective control over our VIEs, (ii) receive substantially all of the economic benefits and absorb losses of our VIEs, and (iii) have an exclusive call option to purchase all or part of the equity interests in and/or assets of our VIEs when and to the extent permitted under the relevant laws. Because of these contractual arrangements, we have control over and are the primary beneficiary of our VIEs and hence consolidate their financial results as our VIEs under U.S. GAAP. See “Corporate History and Structure—Contractual Arrangements among Our VIEs, Their Shareholders and Us.”

In Thailand, we conduct our business activities using a tiered shareholding structure in which direct foreign ownership in each Thai entity is less than 50%. See “Corporate History and Structure—Thailand Shareholding Structure.” As Thai laws only consider the immediate level of shareholding, no cumulative or look-through calculation is applied to determine the foreign ownership status of a company when it has several levels of foreign shareholding. Such shareholding structure has allowed us to consolidate our Thai operating entities as our subsidiaries.

We have engaged legal counsel in each VIE jurisdiction to help us with these arrangements, namely LCS & Partners in Taiwan and Rajah & Tann LCT Lawyers in Vietnam, and each is of the opinion that the VIE structure and related contractual arrangements are not in violation of local laws and regulations. We have also engaged Hunton & Williams (Thailand) Limited in Thailand, and they are of the opinion that the shareholding structure of our Thai operating entities is in compliance with applicable Thai law. However, the local or national authorities or regulatory agencies in any of the VIE jurisdictions or in Thailand may reach a different conclusion, which could lead to an action being brought against us, the VIEs and their shareholders by administrative orders or in local courts. If the authorities of the VIE jurisdictions or Thailand find that our arrangements do not comply with their prohibition or restrictions on foreign investment in our lines of business, or if the relevant government otherwise finds that we or any of our subsidiaries, VIEs or their subsidiaries are in violation of the relevant laws or regulations or lack the necessary registrations, permits or licenses to operate our businesses in such VIE jurisdictions or Thailand, they would have broad discretion in dealing with such violations or failures, including:

 

    revoking the business licenses and/or operating licenses of such entities;

 

    discontinuing or placing restrictions or onerous conditions on the operations of our VIEs or Thai subsidiaries, or on our operations through any transactions between our company or our Cayman Islands or Singapore subsidiaries on the one hand and our VIEs, subsidiaries of such VIEs or our Thai subsidiaries on the other hand;

 

    imposing fines, prohibiting payments by our VIEs or their shareholders to us as contemplated in the contractual arrangements with our VIEs, confiscating income from us, our Cayman Islands or Singapore subsidiaries, VIEs or Thai subsidiaries, or imposing other requirements with which such entities may not be able to comply;

 

    imposing criminal penalties, including fines and imprisonment on our VIEs or Thai subsidiaries, their shareholders or directors;

 

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    requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIEs and their shareholders, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our VIEs or Thai subsidiaries; or

 

    restricting or prohibiting our use of the proceeds of this offering to finance our business and operations in any of these VIE jurisdictions and Thailand.

Any of these actions could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If any of these occurrences results in our inability to direct the activities of our VIEs or Thai subsidiaries that most significantly impact its economic performance, or prevent us from receiving the economic benefits or absorbing losses from these entities, we may not be able to consolidate the entity in our consolidated financial statements in accordance with U.S. GAAP.

We rely on contractual arrangements with our VIEs and their respective shareholders for a significant portion of our business operations, which may not be as effective as direct ownership in providing operational control.

We have relied and expect to continue to rely on contractual arrangements with our VIEs and their shareholders to operate our digital entertainment, e-commerce and digital financial services businesses in the VIE jurisdictions. In 2014, 2015 and 2016 and for the six months ended June 30, 2017, revenue from all of our VIEs accounted for 43.9%, 45.3%, 45.6% and 45.7% of our total revenue, respectively. For a description of these contractual arrangements, see “Corporate History and Structure.” These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIEs. For example, our VIEs and their shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests or these contractual arrangements might be terminated due to non-compliance with the laws of the relevant jurisdiction of the VIEs. Moreover, in the markets in GSEA where we operate, the use of VIEs are relatively new and remain generally untested before regulators and courts, and therefore, may be subject to legal and regulatory scrutiny, investigations and disputes and these arrangements might have their legality, validity or enforceability challenged by the relevant authorities.

If we had a direct controlling equity interest in our VIEs, we would be able to exercise our rights as a controlling shareholder to effect changes in the board of directors of our VIEs, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our VIEs and their shareholders of their obligations under the contracts to exercise control over our VIEs. These shareholders may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks will continue throughout the period in which we intend to operate certain portions of our business through the contractual arrangements with our VIEs. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of the laws where our VIEs are located and through arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the various legal systems in the VIE jurisdictions. Therefore, our contractual arrangements with our VIEs may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

Our VIEs or their respective shareholders may fail to perform their obligations under our contractual arrangements with them.

If our VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce

 

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such arrangements. We may also have to rely on legal remedies under various legal jurisdictions, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure you will be effective under the relevant laws and regulations. For example, if the shareholders of our VIEs refuse to transfer their equity interest in their respective VIEs to us or our designee if we exercise our call option pursuant to these contractual arrangements, or if they otherwise act in bad faith toward us, we may have to take legal action to compel them to perform their contractual obligations. In addition, if any third parties claim any interest in the equity interests of our VIEs, our ability to exercise shareholders’ rights or foreclose the share pledge according to the contractual arrangements may be impaired. If these or other disputes between the shareholders of our VIEs and third parties were to impair our control over our VIEs, our ability to consolidate the financial results of our VIEs would be affected, which would in turn materially and adversely affect our business, financial condition and results of operations.

All of the contracts under our contractual arrangements are governed by the laws and regulations in the respective VIE jurisdiction and most of them provide for the resolution of disputes through arbitration in Singapore. Accordingly, these contracts would be interpreted in accordance with the law of various jurisdictions where our VIEs are situated and any disputes would be resolved in accordance with the applicable legal procedures of their respective jurisdictions, subject to arbitration in Singapore. The legal systems in these VIE jurisdictions are not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the legal systems of these VIE jurisdictions could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a VIE should be interpreted or enforced under the laws of these VIE jurisdictions. There remains significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, according to the agreements we entered into with the VIEs and their respective shareholders, rulings by arbitrators are final and binding on the parties. If the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in the relevant courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIEs, and our ability to conduct our business may be negatively affected.

The shareholders of our VIEs may have potential conflicts of interest with us.

The shareholders of our VIEs are our local employees or other local citizens of the respective markets in which our VIEs operate. None of these shareholders has a significant equity interest in our company and thus their interests may not be aligned with ours, or they may have other potential conflicts of interest with us. These shareholders of our VIEs may breach, or cause our VIEs to breach the existing contractual arrangements we have with them and our VIEs, which would have a material and adverse effect on our ability to effectively control our VIEs and receive economic benefits and absorb losses from them. For example, these shareholders may be able to cause our agreements with our VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

 

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Contractual arrangements in relation to our VIEs may be subject to scrutiny by the local tax authorities and they may determine that we or our VIEs owe additional taxes.

Under the applicable laws and regulations in the VIE jurisdictions, arrangements and transactions among related parties may be subject to audit or challenge by the local tax authorities. We could face material and adverse tax consequences if the local tax authorities determine that the contractual arrangements were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under the applicable laws, rules and regulations, and adjust the income of our VIEs in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIEs for tax purposes, which could in turn increase their tax liabilities. In addition, the local tax authorities may impose late payment fees and other penalties on our VIEs for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if the tax liabilities of our VIEs increase or if they are required to pay late payment fees and other penalties.

We may lose the ability to use and benefit from assets held by our VIEs if such VIE goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

As part of our contractual arrangements with our VIEs, our VIEs hold certain licenses and assets that are material to the operation of our business in the relevant jurisdictions, including data servers and equipment held by our VIEs in Taiwan and Vietnam. If any of our VIEs go bankrupt and all or part of their assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities in the relevant jurisdictions, which could materially and adversely affect our businesses, financial condition and results of operations. Under the contractual arrangements, our VIEs may not, in any manner, sell, transfer, mortgage or dispose of their assets or legal or beneficial interests in the business without our prior consent. If our VIEs undergo a voluntary or involuntary liquidation proceeding, the independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our businesses, which could materially and adversely affect our business, financial condition and results of operations.

Risks Related to Doing Business in Greater Southeast Asia

Our revenue and net income may be materially and adversely affected by any economic slowdown in any regions of GSEA as well as globally.

The success of our business ultimately depends on consumer spending. We derive substantially all of our revenue from GSEA and are exposed to general economic conditions that affect consumer confidence, consumer spending, consumer discretionary income or changes in consumer purchasing habits. As a result, our revenue and net income could be impacted to a significant extent by economic conditions in GSEA and globally, as well as economic conditions specific to digital entertainment, e-commerce and digital financial services. The GSEA and global economy, markets and levels of consumer spending are influenced by many factors beyond our control, including consumer perception of current and future economic conditions, political uncertainty, employment levels, inflation or deflation, real disposable income, interest rates, taxation and currency exchange rates.

Economic growth in GSEA has experienced a mild moderation in recent years, partially due to the slowdown of the Chinese economy since 2012, as well as the global commercial volatility of energy prices, U.S. monetary policies and other markets. Productivity growth in GSEA has also been slowing since the global financial crisis. GSEA will have to cope with potential external and domestic risks to sustain its economic growth. An economic downturn, whether actual or perceived, a further decrease in economic growth rates or an otherwise uncertain economic outlook in GSEA or any other market in

 

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which we may operate could have a material adverse effect on our business, financial condition and results of operations.

Changes in the economic, political or social conditions or government policies in GSEA could have a material adverse effect on our business and operations.

Substantially all of our assets and operations are located in GSEA. Accordingly, our business, financial condition and results of operations may be influenced to a significant degree by political, economic and social conditions in GSEA generally. The GSEA economy differs from most developed markets in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange, government policy on public order and allocation of resources. In some of the GSEA markets, governments continue to play a significant role in regulating industry development by imposing industrial policies. Moreover, some local governments also exercise significant control over the economic growth and public order in their respective jurisdictions through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policies, and providing preferential treatment to particular industries or companies.

While the GSEA economy, as a whole, has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. Any adverse changes in economic conditions in GSEA or in other markets in neighboring regions (such as China and Japan), or in the policies of the governments or of the laws and regulations in each respective market could have a material adverse effect on the overall economic growth of GSEA. Such developments could adversely affect our business and operating results, lead to reduction in demand for our content and services and adversely affect our competitive position. Many of the governments in GSEA have implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over foreign capital investments or changes in tax regulations. Some GSEA markets have historically experienced low growth in their GDP, significant inflation and/or shortages of foreign exchange. We are exposed to the risk of rental and other cost increases due to potential inflation in the markets in which we operate. In the past, some of the governments in GSEA have implemented certain measures, including interest rate adjustments, currency trading band adjustments and exchange rate controls, to control the pace of economic growth. These measures may cause decreased economic activity in GSEA, which may adversely affect our business, financial condition and results of operations.

In addition, some GSEA markets have experienced, and may in the future experience, political instability, including strikes, demonstrations, protests, marches, coups d’état, guerilla activity or other types of civil disorder. These instabilities and any adverse changes in the political environment could increase our costs, increase our exposure to legal and business risks, disrupt our office operations or affect our ability to expand our user base.

Our businesses and operations in Taiwan may be materially and adversely impacted if we are deemed to be a PRC investor or if our VIE arrangements in Taiwan are deemed to be invalid or unenforceable or not in compliance with Taiwan laws.

There have been and remain tensions between the governments of Taiwan and the PRC regarding the international political status of Taiwan. Such tensions between the governments may impact economic and social activities in Taiwan, which may in turn impact our businesses and operations generally in Taiwan. Furthermore, due in large part to these tensions, the Taiwan government had historically imposed prohibitions and restrictions on investments, directly and

 

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indirectly, by PRC investors. “PRC investors” refer to PRC individuals, juristic persons, organizations and other institutions, and PRC invested companies from other jurisdictions. “PRC invested companies from other jurisdictions” refer to those entities incorporated outside of the PRC and invested by PRC individuals, juristic persons, organizations and other institutions that: (i) directly or indirectly hold more than 30% of the shares or capital of such entities, or (ii) have the ability to control such entities. Under the current policies on PRC investments in Taiwan, PRC investors are allowed to invest, upon prior approval, in Taiwan companies that operate business in the statutory business categories listed as permitted in the Positive Listings promulgated by the Taiwan authorities, and are prohibited or restricted from investing in all other businesses.

Under Taiwan company laws, a Taiwan company is required to select from a statutory list of business categories for inclusion in its corporate registration based on various aspects of its business operations. Some of the statutory categories currently listed in the corporate registration of our material Taiwan VIEs include computer recreational activities, software publication, third party payments and general advertising services that are not within the Positive Listings. The other statutory business categories currently listed in the business scope of the corporate registration of our Taiwan VIEs are within the Positive Listings, including the data processing services listed in the corporate registration of our digital entertainment and e-commerce business entities, and the software design services currently listed in the corporate registration of our digital entertainment business entity.

We do not believe, based on advice from our Taiwan counsel, LCS & Partners, that we are a PRC investor under existing Taiwan law and court judgments. See “Corporate History and Structure—Contractual Arrangements among Our VIEs, Their Shareholders and Us” for the basis of our belief. Therefore, we do not believe that we are prohibited from operating businesses that have statutory business categories not listed as permitted in the Positive Listings or that we need to seek prior approval for operating businesses that have statutory business categories listed as permitted in the Positive Listings. However, we cannot be certain that Taiwan authorities will not take a different view and make inquiries and take actions against us, nor can we anticipate the outcome of such inquiries or actions.

In order to minimize the potential for disruptions to our Taiwan operations, we conduct our businesses in Taiwan through VIE arrangements. Taiwan is also one of the largest markets for our Garena digital entertainment and Shopee e-commerce businesses. In 2016 and the six months ended June 30, 2017, revenue from Taiwan constituted 31.7% and 29.1% of our total revenues, respectively. We believe, based on advice from our Taiwan counsel, LCS & Partners, that (i) these Taiwan VIE structures are not in violation of Taiwan laws and regulations currently in effect, and (ii) the VIE contractual arrangements are valid, binding and enforceable and are not in violation of Taiwan laws and regulations currently in effect. However, should the validity or enforceability of these contractual arrangements be challenged by Taiwan authorities and we are deemed a PRC investor, our operations in Taiwan may be materially and adversely affected.

Should the Taiwan authorities deem that we are a PRC investor or that our arrangements with our VIE entities in Taiwan are not in compliance with Taiwan laws, the Taiwan authorities may take a range of actions, including:

 

    imposing fines between NT$120,000 (US$3,950) to NT$600,000 (US$19,750) and further fines if the non-compliance is not rectified as ordered;

 

    ordering us to reduce any direct or indirect ownership or control by PRC investors in our company;

 

    requesting us to divest some or all of our control and ownership of the VIEs;

 

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    suspending the rights of shareholders of our Taiwan VIEs or requesting us and/or our Taiwan VIEs and their shareholders to terminate some or all of our contractual arrangements with our Taiwan VIEs and their shareholders; and

 

    discontinuing the operations and revoking the business licenses of our Taiwan VIEs.

These and other actions the Taiwan authorities may take against us could also materially and adversely affect our ability to direct the activities of our Taiwan VIEs or receive the economic benefits from our Taiwan VIEs, which could in turn affect the consolidation of the financial results of our Taiwan VIEs.

Uncertainties with respect to the legal system in certain markets in GSEA could adversely affect us.

The legal systems in GSEA vary significantly from jurisdiction to jurisdiction. Some jurisdictions have a civil law system based on written statutes and others are based on common law. Unlike the common law system, prior court decisions under the civil law system may be cited for reference but have limited precedential value.

Many of the markets in GSEA have not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in such markets. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since local administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy in many of the localities that we operate in. Moreover, local courts may have broad discretion to reject enforcement of foreign awards. These uncertainties may affect our judgment on the relevance of legal requirements and our ability to enforce our contractual rights or tort claims. In addition, the regulatory uncertainties may be exploited through unmerited or frivolous legal actions or threats in attempts to extract payments or benefits from us.

Each jurisdiction in GSEA has enacted, and may enact or amend from time to time, laws and regulations governing the distribution of games, services, messages, applications, electronic documents and other content through the internet. The relevant government authorities may prohibit the distribution of information through the internet that they deem to be objectionable on various grounds, such as public interest or public security, or to otherwise be in violation of local laws and regulations. If any of the information disseminated through our platforms were deemed by any relevant government authorities to violate content restrictions, we would not be able to continue to display such content and could be subject to penalties, including confiscation of the property used in the non-compliant acts, removal of the infringing content, temporary or permanent blocks, administrative fines, suspension of business, revocation of the registration to act as an electronic systems provider and revocation of required licenses, which could materially and adversely affect our business, financial condition and results of operations.

Furthermore, many of the legal systems in GSEA are based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive effect. There are other circumstances where key regulatory definitions are unclear, imprecise or missing, or where interpretations that are adopted by regulators are inconsistent with interpretations adopted by a court in analogous cases. As a result, we may not be aware of our violation of certain policies and rules until sometime after the violation. In addition, any administrative and court proceedings in GSEA may be protracted, resulting in substantial costs and diversion of resources and management attention.

 

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It is possible that a number of laws and regulations may be adopted or construed to apply to us in GSEA and elsewhere that could restrict our industries. Scrutiny and regulation of the industries in which we operate may further increase, and we may be required to devote additional legal and other resources to addressing this regulation. For example, existing laws or new laws regarding the regulation of currency, money laundering, banking institutions, unclaimed property, e-commerce, consumer and data protection and intermediary payments may be interpreted to cover virtual items offered on our digital entertainment platform. Changes in current laws or regulations or the imposition of new laws and regulations in GSEA or elsewhere regarding our industries may slow the growth of our industries and adversely affect our financial position and results of operations.

It is not certain if Sea Limited will be classified as a Singapore tax resident.

Under the Singapore Income Tax Act, a company established outside Singapore but whose governing body, being the board of directors, usually exercises de facto control and management of its business in Singapore could be considered a tax resident in Singapore. However, such control and management of the business should not be deemed to be in Singapore if physical board meetings are conducted outside of Singapore. Where board resolutions are passed in the form of written consent signed by the directors each acting in their own jurisdictions, or where the board meetings are held by teleconference or videoconference, it is possible that the place of de facto control and management will be considered to be where the majority of the board are located when they sign such consent or attend such conferences.

We believe that Sea Limited is not a Singapore tax resident for Singapore income tax purposes. However, the tax residence status of Sea Limited is subject to determination by the Inland Revenue Authority of Singapore, or IRAS, and uncertainties remain with respect to the interpretation of the term “control and management” for the purposes of the Singapore Income Tax Act. If IRAS determines that Sea Limited is a Singapore tax resident for Singapore income tax purposes, the portion of Sea Limited’s single company income on an unconsolidated basis that is received or deemed by the Singapore Income Tax Act to be received in Singapore, where applicable, may be subject to Singapore income tax at the prevailing tax rate of 17% before applicable income tax exemptions or relief. If Sea Limited is regarded as a Singapore tax resident, any dividends received or deemed received by Sea Limited in Singapore from subsidiaries located in a foreign jurisdiction with a rate of income tax or tax of a similar nature of no more than 15% may generally be subject to additional Singapore income tax where there is no other applicable tax treaty between such foreign jurisdiction and Singapore. Income is considered to have been received in Singapore when it is: (i) remitted to, transmitted or brought into Singapore; (ii) applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore; or (iii) applied to purchase any movable property that is brought into Singapore. In addition, as Singapore does not impose withholding tax on dividends declared by Singapore resident companies, if Sea Limited is considered a Singapore tax resident, dividends paid to the holders of our ordinary shares and ADSs will not be subject to withholding tax in Singapore. Regardless of whether or not Sea Limited is regarded as a Singapore tax resident, holders of our ordinary shares or the ADSs who are not Singapore tax residents would generally not be subject to Singapore income tax on gains derived from the disposal of our ordinary shares or the ADSs if such shareholders do not maintain a permanent establishment in Singapore, to which the disposition gains may be effectively connected, and the entire process (including the negotiation, deliberation, execution of the acquisition and sale, etc.) leading up to the actual acquisition and sale of the ADSs or our ordinary shares is performed outside of Singapore. For Singapore resident shareholders, if the gain from disposal of our ordinary shares or the ADSs is considered by IRAS as income in nature, such gain will generally be subject to Singapore income tax, and not taxable in Singapore if the gain is considered by IRAS as capital gains in nature. See “Taxation—Singapore Tax Considerations—Income Tax—Gains With Respect to Disposition of the ADSs or Our Ordinary Shares.”

 

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It will be difficult to acquire jurisdiction and enforce liabilities against our assets based in some GSEA jurisdictions.

Substantially all of our assets are located in GSEA and all of our executive officers and present directors reside outside of the United States. As a result, it may not be possible for United States investors to enforce their legal rights, to effect service of process upon our directors or executive officers or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and executive officers under Federal securities laws. Moreover, management has been advised that Indonesia, Taiwan, Thailand and many of the other jurisdictions within GSEA where we operate do not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States. Further, it is unclear if extradition treaties now in effect between the United States and some GSEA markets, such as Indonesia, the Philippines and Malaysia, would permit effective enforcement of criminal penalties of the Federal securities laws.

Fluctuations in foreign currency exchange rates will affect our financial results, which we report in U.S. Dollars.

We operate in multiple jurisdictions, which exposes us to the effects of fluctuations in currency exchange rates. We earn revenue denominated in Indonesian Rupiah, New Taiwan Dollars, Vietnamese Dong, Thai Baht, Philippine Pesos, Malaysian Ringgit, Singapore Dollars and U.S. Dollars, among other currencies. We generally pay license fees to game developers in U.S. Dollars and incur expenses for employee compensation and other operating expenses in the local currencies in the jurisdictions in which we operate, including the jurisdictions described above and the PRC. Fluctuations in the exchange rates between the various currencies that we use could result in expenses being higher and revenue being lower than would be the case if exchange rates were stable. We cannot assure you that movements in foreign currency exchange rates will not have a material adverse effect on our results of operations in future periods. We do not generally enter into hedging contracts to limit our exposure to fluctuations in the value of the currencies that our businesses use. Furthermore, the substantial majority of our revenue is denominated in emerging markets currencies. Because fluctuations in the value of emerging markets currencies are not necessarily correlated, there can be no assurance that our results of operations will not be adversely affected by such volatility.

Restrictions on currency exchange in certain GSEA markets may limit our ability to receive and use our revenue effectively.

A large majority of our revenue and expenses are denominated in New Taiwan Dollars, Vietnamese Dong and Thai Baht. If revenue denominated in New Taiwan Dollars, Vietnamese Dong and Thai Baht increase or expenses denominated in such currencies decrease in the future, we may need to convert a portion of our revenue into other currencies to meet our foreign currency obligations, including, among others, payment of dividends declared, if any, in respect of our ordinary shares. Currently, in Taiwan, a single remittance by a company for an amount over US$1 million or remittances by a company in annual aggregate amounts exceeding US$50 million may not be processed without the approval of the Central Bank of the Republic of China (Taiwan). In Vietnam, exchanging Vietnamese Dong into foreign currency must be conducted at a licensed credit institution such as a licensed commercial bank. Conversion of Thai Baht to another currency is subject to regulations promulgated by the Ministry of Finance and Bank of Thailand. We cannot guarantee that we will be able to convert such local currencies into U.S. Dollars or other foreign currencies to pay dividends or for other purposes on a timely basis or at all.

The ability of our subsidiaries in certain GSEA markets to distribute dividends to us may be subject to restrictions under their respective laws.

We are a holding company, and our subsidiaries are located throughout GSEA including Indonesia, Thailand and Singapore. Part of our primary internal sources of funds to meet our cash

 

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needs is our share of the dividends, if any, paid by our subsidiaries. The distribution of dividends to us from the subsidiaries in these markets as well as other markets where we operate is subject to restrictions imposed by the applicable laws and regulations in these markets, which are more fully described in “Dividend Policy” in this prospectus. In addition, although there are currently no foreign exchange control regulations which restrict the ability of our subsidiaries in Indonesia, Thailand and Singapore to distribute dividends to us, the relevant regulations may be changed and the ability of these subsidiaries to distribute dividends to us may be restricted in the future.

Risks Related to the ADSs and this Offering

An active trading market for the ADSs may not develop and the trading price for the ADSs may fluctuate significantly.

The ADSs will be traded on the New York Stock Exchange. We have no current intention to seek a listing for our ordinary shares on any other stock exchange. Prior to the completion of this offering, there has been no public market for the ADSs or our ordinary shares, and we cannot assure you that a liquid public market for the ADSs will develop. If an active public market for the ADSs does not develop following the completion of this offering, the market price and liquidity of the ADSs may be materially and adversely affected. The initial public offering price for the ADSs was determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of the ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

The trading price of the ADSs is likely to be volatile, which could result in substantial losses to investors.

The trading price of the ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in GSEA that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for the ADSs may be highly volatile for factors specific to our own operations, including the following:

 

    variations in our quarterly or annual revenue, earnings and cash flow;

 

    announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;

 

    announcements of new content and services or plan of expansions by us or our competitors;

 

    changes in financial estimates by securities analysts;

 

    detrimental adverse publicity about us, our platforms or our industries;

 

    additions or departures of key personnel;

 

    release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

 

    potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the volume and price at which the ADSs will trade.

In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we

 

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were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

Certain existing shareholders have substantial influence over our company and their interests may not be aligned with the interests of our other shareholders.

We will adopt the dual-class voting structure such that our ordinary shares will consist of Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering. Based on our dual-class voting structure, in respect of matters requiring a shareholders’ vote, holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to three votes per share. We will issue Class A ordinary shares represented by ADSs in this offering. The ordinary shares, including the issued and outstanding non-voting ordinary shares, series A preference shares and series B preference shares, which will automatically convert into ordinary shares on a one-to-one basis immediately prior to completion of this offering, held by our founder, Forrest Xiaodong Li, and Tencent and their respective affiliates will be re-designated as Class B ordinary shares on a one-for-one basis. All of our remaining issued and outstanding ordinary shares, including the remaining issued and outstanding non-voting ordinary shares, seed preferred shares, series A preference shares and series B preference shares, which will automatically convert into ordinary shares on a one-to-one basis immediately prior to completion of this offering, will be re-designated as Class A ordinary shares on a one-for-one basis.

Due to the different voting powers associated with our two classes of ordinary shares, we anticipate that upon the completion of this offering, our founder and Tencent will collectively own         % of the total voting power of our total issued and outstanding ordinary shares, assuming the underwriters do not exercise their option to purchase additional ADSs. As a result, our founder and Tencent have substantial influence over our business, including significant corporate actions such as mergers, consolidations, sales of all or substantially all of our assets, election of directors and other significant corporate actions. Pursuant to an irrevocable proxy between our founder and Tencent that becomes effective immediately prior to the completion of this offering, Tencent has agreed to appoint our founder as its proxy with respect to all or a portion of the Class B ordinary shares held by Tencent on matters that are subject to the vote of shareholders. See “Description of Share Capital—Ordinary Shares—Class of Ordinary Shares; Conversion” for more information. Furthermore, under our amended and restated memorandum and articles of association effective immediately prior to the completion of this offering, any change of control of our company upon merger or consolidation, scheme of arrangement or other similar transactions, or the sale or exclusive license of all or substantially all of our intellectual property, will require the separate approval of holders of at least 80% of Class B ordinary shares then outstanding. See “Description of Share Capital—Ordinary Shares—Special Approvals” for more information.

These shareholders may take actions that are not aligned with the interests of our other shareholders. This concentration of ownership as well as voting and approval rights among holders of Class B ordinary shares may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of the ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering. In addition, the significant concentration of share ownership may adversely affect the trading price of the ADSs due to investors’ perception that conflicts of interest may exist or arise. For more information regarding our principal shareholders and their affiliated entities, see “Principal Shareholders.”

 

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The depositary for the ADSs will give us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs at shareholders’ meetings if you do not give voting instructions to the depositary, except in limited circumstances, which could adversely affect your interests.

Under the deposit agreement for the ADSs, the depositary will give us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs at shareholders’ meetings if you do not give voting instructions to the depositary, unless:

 

    we have failed to timely provide the depositary with our notice of meeting and related voting materials;

 

    we have instructed the depositary that we do not wish a discretionary proxy to be given;

 

    we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;

 

    a matter to be voted on at the meeting would have a material adverse impact on shareholders; or

 

    voting at the meeting is made on a show of hands.

The effect of this discretionary proxy is that, if you fail to give voting instructions to the depositary, you cannot prevent our Class A ordinary shares underlying your ADSs from being voted, absent the situations described above, and it may make it more difficult for shareholders to influence our management. Holders of our ordinary shares are not subject to this discretionary proxy.

We have granted, and may continue to grant, share incentives, which may result in increased share-based compensation expenses.

We adopted the 2009 Share Incentive Plan in September 2009, which was later amended in December 2013, December 2014 and March 2017, or the 2009 Plan, for the purpose of granting share based compensation awards to employees, directors and consultants to incentivize their performance and align their interests with ours. According to the 2009 Plan, the maximum aggregate number of shares which may be issued pursuant to all awards under the plan is 50,000,000. We are authorized to grant options, share appreciation rights, share awards of restricted shares and non-restricted shares and other types of awards the administrator of the 2009 Plan decides. We account for compensation costs for all share options using a fair-value based method and recognize expenses in our consolidated statements of operations in accordance with U.S. GAAP. As of June 30, 2017, we had outstanding 303,333 restricted shares that remained unvested and options to purchase 6,891,880 ordinary shares (including voting and non-voting ordinary shares), excluding awards that were forfeited, canceled or repurchased and held as treasury shares after the relevant grant dates. As a result of these grants, we incurred share-based compensation of US$4.0 million, US$20.6 million, US$28.8 million and US$11.4 million in 2014, 2015, 2016 and the six months ended June 30, 2017, respectively. For more information on our share incentive plan, see “Management—Share Incentive Plan.” We will incur additional share-based compensation expenses in the future as we continue to grant share-based incentives. We believe the granting of share-based compensation is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

Substantial future sales or perceived potential sales of the ADSs, Class A ordinary shares or other equity securities in the public market could cause the price of the ADSs to decline significantly.

Sales of substantial amounts of the ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of the

 

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ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and all other Class A ordinary shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be              ADSs (representing              Class A ordinary shares) outstanding immediately upon the completion of this offering, or              ADSs (representing              Class A ordinary shares) if the underwriters exercise their option in full to purchase additional ADSs. In addition, as of the date of this prospectus, we have outstanding convertible promissory notes in the aggregate principal amount of US$675 million. The holders of the convertible promissory notes may convert all or any portion of the outstanding principal under the notes into Class A ordinary shares at any time before or after this offering, subject to applicable lock-up agreements, and prior to the maturity date, which we expect them to do. The convertible promissory notes may be converted into up to              Class A ordinary shares at a conversion price ranging from US$             to US$            , which assumes an initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus. In the event the convertible promissory notes are converted, your ownership interest will be diluted.

In connection with this offering, we, our directors and executive officers, our existing shareholders, and holders of our convertible promissory notes have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or otherwise dispose of any ADSs, ordinary shares or similar securities or any securities convertible into or exchangeable or exercisable for ordinary shares or ADSs, for a period ending 180 days after the date of this prospectus without the prior written consent of the underwriters, subject to certain exceptions. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of the ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.

The trading market for the ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade the ADSs, the market price for the ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for the ADSs to decline.

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of the ADSs for return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in ADSs as a source for any future dividend income.

Our board of directors has complete discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital

 

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requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in the ADSs and you may even lose your entire investment in the ADSs.

We have not determined a specific use for a portion of the net proceeds from this offering and we may use these proceeds in ways with which you may not agree.

We have not determined a specific use for a portion of the net proceeds of this offering, and our management will have considerable discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment and discretion of our management regarding the application of a portion of the net proceeds of this offering. We cannot assure you that the net proceeds will be used in a manner that would improve our results of operations or increase the ADS price, nor that these net proceeds will be placed only in investments that generate income or appreciate in value.

Our memorandum and articles of association contain anti-takeover provisions and a dual-class voting structure that could have a material adverse effect on the rights of holders of our Class A ordinary shares and the ADSs.

We have adopted an amended and restated memorandum and articles of association, which will become effective immediately prior to the completion of this offering. Our new memorandum and articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our new memorandum and articles of association also contain a dual-class voting structure that gives disproportionate voting power to the Class B ordinary shares to be held by our founder, Forrest Xiaodong Li, and Tencent and their respective affiliates. We anticipate that our founder and Tencent will beneficially own an aggregate of             % of the total voting power of our total issued and outstanding ordinary shares immediately after the completion of this offering, assuming the underwriters do not exercise their option to purchase additional ADSs. In addition, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights (other than to issue additional supervoting shares, which would require the consent of holders of Class B ordinary shares), terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of the ADSs may fall and the voting and other rights of the holders of our Class A ordinary shares and the ADSs may be materially and adversely affected.

 

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You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law, we conduct substantially all of our operations and all of our directors and executive officers reside outside of the United States.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2016 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as the United States. To the extent we choose to follow home country practice with respect to corporate governance matters, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

Certain judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands company and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in GSEA. In addition, most of our current directors and executive officers are not United States nationals or residents. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the jurisdictions that comprise the GSEA region may render you unable to enforce a judgment

 

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against our assets or the assets of our directors and executive officers. For more information regarding the relevant laws of the Cayman Islands and the GSEA markets, see “Enforceability of Civil Liabilities.”

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your Class A ordinary shares.

As a holder of ADSs, you will only be able to exercise the voting rights with respect to the underlying Class A ordinary shares in accordance with the provisions of the deposit agreement. You may not have the same voting rights as the holders of our Class A ordinary shares and may not receive voting materials in time to be able to exercise your right to vote. Under the deposit agreement, you must vote by giving voting instructions to the depositary. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class A ordinary shares in accordance with these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares unless you withdraw your Class A ordinary shares from the depositary and become a registered holder of such shares. When a general meeting is convened, you may not receive sufficient advance notice to withdraw your Class A ordinary shares to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We have agreed to give the depositary at least 30 days’ prior notice of shareholder meetings. Nevertheless, we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the Class A ordinary shares underlying your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the Class A ordinary shares underlying your ADSs are not voted as you requested.

Because our initial public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately US$             per ADS. See “Dilution” for a more complete description of how the value of your investment in ADSs will be diluted upon the completion of this offering.

You may be subject to limitations on the transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADSs on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

 

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You may experience dilution of your holdings due to an inability to participate in rights offerings.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act, or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of the ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to domestic public companies in the United States.

Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including: (i) the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iv) the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the New York Stock Exchange. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to you, were you investing in a U.S. domestic issuer.

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

We are a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, impose various requirements on the corporate governance practices of public companies. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

 

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As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenue of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.07 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of the ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. After we are no longer an emerging growth company, we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC.

If we are a passive foreign investment company for United States federal income tax purposes for any taxable year, United States holders of ADSs or our ordinary shares could be subject to adverse United States federal income tax consequences.

A non-United States corporation will be a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year if either (i) at least 75% of its gross income for such year is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets) during such year is attributable to assets that produce or are held for the production of passive income. A separate determination must be made after the close of each taxable year as to whether a non-United States corporation is a PFIC for that year. Based on the current and anticipated value of our assets, composition of our income and assets, and the expected price of the ADSs in this offering, we do not expect to be a PFIC for United States federal income tax purposes for our current taxable year ending December 31, 2017. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you the United States Internal Revenue Service, or IRS, will not take a contrary position.

The classification of certain of our income as active or passive, and certain of our assets as producing active or passive income, and hence whether we are or will become a PFIC, depends on the interpretation of certain United States Treasury Regulations, including certain regulations relating to royalty income and income from intangible assets, as well as certain IRS guidance relating to the classification of assets as producing active or passive income. Such regulations and guidance are potentially subject to different interpretations. If the percentage of our passive income or the percentage of our assets treated as producing passive income increases, for example due to a differing interpretation of such regulations and guidance, we may be a PFIC for the current taxable year ending December 31, 2017 or we may become a PFIC for one or more future taxable years. In addition, although the law in this regard is not entirely clear, we treat our VIEs and each of their subsidiaries as being owned by us for United States federal income tax purposes, because we are entitled to substantially all of the economic benefits associated with such entities. Also, we control the

 

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management decisions of such entities, and we consolidate the results of their operations in our consolidated U.S. GAAP financial statements. If it is determined, however, that we are not the owner of our VIEs or any of their subsidiaries for United States federal income tax purposes, their income and assets will not be included for purposes of determining our PFIC status, and as a result, we may be treated as a PFIC for the current and any subsequent taxable year.

Changes in the composition of our income or composition of our assets may cause us to become a PFIC. The determination of whether we will be a PFIC for any taxable year may depend in part upon the value of our goodwill not reflected on our balance sheet (which may depend upon the market value of the ADSs from time to time, which may be volatile) and also may be affected by how, and how quickly, we spend our liquid assets and the cash raised in this offering. In estimating the value of our goodwill, we have taken into account our anticipated market capitalization following the listing of the ADSs on the New York Stock Exchange. Among other matters, if our market capitalization is less than anticipated or subsequently declines, we may be or become a PFIC for the current or future taxable years because our liquid assets and cash (which are for this purpose considered assets that produce passive income) may then represent a greater percentage of our overall assets. Further, while we believe our classification methodology and valuation approach is reasonable, it is possible that the IRS may challenge our classification or valuation of our goodwill, which may result in our being or becoming a PFIC for the current year or one or more future taxable years.

If we are a PFIC for any taxable year during which a United States person holds ADSs or ordinary shares, certain adverse United States federal income tax consequences could apply to such United States person. See “Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This prospectus contains forward-looking statements that involve risks and uncertainties. All statements other than statements of current or historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

In some cases, you can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements about:

 

    our goals and strategies;

 

    our future business development, financial condition and results of operations;

 

    the expected growth in, and market size of, the digital entertainment, e-commerce and digital financial services industries in GSEA, including segments within those industries;

 

    expected changes in our revenue, costs or expenditures;

 

    our ability to continue to source and offer new and attractive online games and to offer other engaging digital entertainment content;

 

    the expected growth of digital financial services platform;

 

    the expected growth of e-commerce platform;

 

    our expectations regarding growth in our user base and level of engagement;

 

    our ability to continue to develop new technologies and/or upgrade our existing technologies;

 

    our expectation regarding the use of proceeds from this offering;

 

    growth of and trends of competition in our industry;

 

    government policies and regulations relating to our industry; and

 

    general economic and business conditions in the markets we have businesses.

You should read this prospectus and the documents that we refer to in this prospectus with the understanding that our actual future results may be materially different from and worse than what we expect. Other sections of this prospectus include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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This prospectus also contains statistical data and estimates that we obtained from industry publications and reports generated by government or third-party providers of market intelligence. Although we have not independently verified the data, we believe that the publications and reports are reliable. See “Risk Factors—Risks Related to Our Business—Industry data, projections and estimates contained in this prospectus are inherently uncertain and subject to interpretation. Accordingly, you should not place undue reliance on such information.”

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$             million, or approximately US$             million if the underwriters exercise their option to purchase additional ADSs in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. These estimates are based upon an assumed initial offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus. A US$1.00 change in the assumed initial public offering price of US$             per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease the net proceeds of this offering by US$             million, or approximately US$             million if the underwriters exercise their option to purchase additional ADSs in full, under these assumptions.

The primary purposes of this offering are to create a public market for our Class A ordinary shares in the form of ADSs for the benefit of all shareholders, retain talented employees by providing them with equity incentives and obtain additional capital. We plan to use the net proceeds of this offering as follows:

 

    US$             million for growing our business, including user acquisition, content procurement and research and development; and

 

    the remainder for working capital and other general corporate purposes.

The amounts and timing of any expenditures will vary depending on the amount of cash generated by our operations, and the rate of growth, if any, of our business, and our plans and business conditions. The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management will have significant flexibility in applying and discretion to apply the net proceeds of the offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus.

Pending use of the net proceeds, we intend to hold our net proceeds in demand deposits or invest them in interest-bearing government securities.

 

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DIVIDEND POLICY

We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

Our board of directors has discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the Class A ordinary shares underlying the ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to the ADS holders who will receive payment to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. Dollars.

We are a holding company incorporated in the Cayman Islands. For our cash requirements, including any payment of dividends to our shareholders, we rely upon payments from our operating entities. We rely on a combination of dividend payments and service and license fee payments from our subsidiaries in markets such as Indonesia, Thailand and Singapore, and service and license fee payments from our VIEs in markets such as Taiwan and Vietnam. Regulations in certain markets where we utilize dividend payments may restrict the ability of our subsidiaries to pay dividends to us, including:

 

    in Indonesia, a company can only declare dividends if it has positive retained earnings at the end of a financial year, but a company may distribute interim dividends prior to the end of a financial year if permitted by its articles of association and provided that the interim dividends do not result in the company’s net assets becoming less than the total issued and paid up capital and the compulsory reserves fund, and Indonesian law requires a limited liability company to reserve a certain amount from its net profit each year as a reserve fund until such fund amounts to at least 20% of its issued and paid up capital;

 

    in Thailand, dividends may only be distributed out of a company’s retained earnings and a company looking to distribute dividends is required to set aside at least 5% of its retained earnings into a legal reserve fund at the time the dividends are paid, until and unless the legal reserve fund reaches 10% of the company’s registered capital; and

 

    in Singapore, a company is allowed to pay dividends out of profits in compliance with Section 403 of the Singapore Companies Act (which prohibits dividends from being paid out of profits applied towards the purchase of the company’s own shares or gains derived by the company from the disposal of treasury shares) and in accordance with the company’s constitution and the generally accepted accounting principles in Singapore.

See “Regulation—Indonesia—Regulations on Dividend Distributions,” “Regulation—Thailand—Regulations on Dividend Distributions,” “Regulation—Singapore—Regulations on Dividend Distributions” and “Risk Factors—Risks Related to Doing Business in Greater Southeast Asia—The ability of our subsidiaries in certain GSEA markets to distribute dividends to us may be subject to restrictions under their respective laws.”

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2017:

 

    on an actual basis;

 

    on a pro forma basis to give effect to (i) the repurchase and cancellation of 1,173,520 voting ordinary shares and 1,604,260 non-voting ordinary shares held by a shareholder in exchange for 45.18% of Vietnam Payment Solutions JSC, or VN Pay, in August 2017, (ii) the repayment by certain senior management members and employees of all outstanding promissory notes and loans due to us in August 2017, and (iii) the automatic conversion of the issued and outstanding seed preferred shares, series A preference shares and series B preference shares into ordinary shares on a one-to-one basis and the re-designation of all the ordinary shares into an aggregate of 114,069,304 Class A ordinary shares and 151,517,946 Class B ordinary shares on a one-for-one basis and on a pro forma basis immediately prior to the completion of this offering; and

 

    on a pro forma as adjusted basis to give effect to (i) the repurchase and cancellation of 1,173,520 voting ordinary shares and 1,604,260 non-voting ordinary shares held by a shareholder in exchange for 45.18% of VN Pay in August 2017, (ii) the repayment by certain senior management members and employees of all outstanding promissory notes and loans due to us in August 2017, (iii) the automatic conversion of the issued and outstanding seed preferred shares, series A preference shares and series B preference shares into ordinary shares on a one-to-one basis and the re-designation of all the ordinary shares into an aggregate of 114,069,304 Class A ordinary shares and 151,517,946 Class B ordinary shares on a one-for-one basis and on a pro forma basis immediately prior to the completion of this offering, and (iv) the issuance and sale of              Class A ordinary shares in the form of ADSs by us in this offering at an assumed initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 30, 2017  
     Actual     Pro Forma     Pro Forma As
Adjusted
 
    

(unaudited)

 
     (US$ thousands, except for share and
per share data)
 

Mezzanine equity:

      

Seed contingently redeemable convertible preferred shares (US$0.0005 par value, 10,000,000 shares authorized, 10,000,000 issued and outstanding on an actual basis, and none on a pro forma basis or pro forma as adjusted basis)

     500              

Series A contingently redeemable convertible preference shares (US$0.0005 par value, 62,500,000 shares authorized, 62,500,000 shares issued and outstanding on an actual basis, and none on a pro forma basis or pro forma as adjusted basis)

     10,000              

Series B contingently redeemable convertible preference shares (US$0.0005 par value, 13,836,030 shares authorized, 13,836,030 shares issued and outstanding on an actual basis, and none on a pro forma basis or pro forma as adjusted basis)

     194,575              
  

 

 

   

 

 

   

 

 

 

Total mezzanine equity

     205,075              

Shareholders’ equity/(deficit):

      

Ordinary shares (US$0.0005 par value; 586,163,970 shares authorized, 182,029,000 shares issued and outstanding on an actual basis)

     91          

Class A ordinary shares (114,069,304 shares issued and outstanding on a pro forma basis and              shares issued and outstanding on a pro forma as adjusted basis)

           57    

Class B ordinary shares (151,517,946 shares issued and outstanding on a pro forma basis and              shares issued and outstanding on a pro forma as adjusted basis)

           76    

Additional paid-in capital(1)

     383,949       605,409    

Accumulated other comprehensive income

     7,059       7,059    

Statutory reserves

     46       46    

Accumulated deficit

     (670,150     (711,204  
  

 

 

   

 

 

   

 

 

 

Total Sea Limited’s shareholders’ deficit

     (279,005     (98,557  

Non-controlling interest

     34       34    
  

 

 

   

 

 

   

 

 

 

Total shareholders’ deficit(1)

     (278,971     (98,523  
  

 

 

   

 

 

   

 

 

 

Total capitalization(1)

     (73,896     (98,523  
  

 

 

   

 

 

   

 

 

 

 

(1) A US$1.00 increase (decrease) in the assumed initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by US$             million, assuming the number of ADSs offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The discussion and table above exclude the exercises of share incentive awards under the 2009 Plan after June 30, 2017 and the issuance of up to              Class A ordinary shares issuable upon conversion of outstanding convertible promissory notes in the aggregate principal amount of US$675 million after this offering at a conversion price ranging from US$             to US$            , which assumes an initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus. See “Description of Share Capital—History of Securities Issuances—Convertible Promissory Notes.”

 

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DILUTION

If you invest in the ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per Class A ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding shares.

Net tangible book value represents the amount of our total consolidated tangible assets, which represent the amount of our total consolidated assets, excluding intangible assets and deferred initial public offering expenses, less consolidated liabilities. Our net tangible book value as of June 30, 2017 was a deficit of approximately US$101.1 million, or US$0.56 per ordinary share and US$             per ADS. We incurred the deficit primarily because our convertible promissory notes are carried as liabilities. The terms of conversion of the convertible promissory notes are as disclosed in the notes to the unaudited interim condensed consolidated financial statements. Dilution is determined by subtracting pro forma as adjusted net tangible book value per ordinary share, after giving effect to the additional proceeds we will receive from this offering, from the assumed initial public offering price per ordinary share. Because Class A ordinary shares and Class B ordinary shares have the same rights to dividends and other rights, except for voting and conversion rights and certain approval rights, the dilution is presented based on all ordinary shares, including Class A ordinary shares and Class B ordinary shares.

Without taking into account any other changes in such net tangible book value after June 30, 2017, other than to give effect to (i) the automatic conversion of our outstanding seed preferred shares, series A preference shares and series B preference shares into 86,336,030 ordinary shares at a one-to-one conversion ratio immediately upon the completion of this offering; and (ii) the issuance and sale of              ADSs in this offering at an assumed initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us and assuming the underwriters’ option to purchase additional ADSs is not exercised, our pro forma as adjusted net tangible book value as of June 30, 2017 would have been US$             per outstanding ordinary share, including ordinary shares underlying our outstanding ADSs, or US$             per ADS. This represents an immediate increase in net tangible book value of US$             per ordinary share, or US$             per ADS, to existing shareholders and an immediate dilution in net tangible book value of US$             per ordinary share, or US$             per ADS, to investors purchasing ADSs in this offering. The pro forma as adjusted information discussed above is illustrative only. The following table illustrates such dilution:

 

     Per Ordinary
Share
    Per ADS  

Assumed initial public offering price

   US$                  US$               

Net tangible book value as of June 30, 2017

   US$ (0.56   US$  

Pro forma net tangible book value after giving effect to (i) the repurchase and cancellation of 1,173,520 voting ordinary shares and 1,604,260 non-voting ordinary shares held by a shareholder in exchange for 45.18% of VN Pay in August 2017, (ii) the repayment by certain senior management members and employees of all outstanding promissory notes and loans due to us in August 2017, and (iii) the automatic conversion of all of our outstanding seed preferred shares, series A preference shares and series B preference shares

   US$ (0.38   US$  

 

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     Per Ordinary
Share
     Per ADS  

Pro forma as adjusted net tangible book value after giving effect to (i) the repurchase and cancellation of 1,173,520 voting ordinary shares and 1,604,260 non-voting ordinary shares held by a shareholder in exchange for 45.18% of VN Pay in August 2017, (ii) the repayment by certain senior management members and employees of all outstanding promissory notes and loans due to us in August 2017, (iii) the automatic conversion of all of our outstanding seed preferred shares, series A preference shares and series B preference shares, and (iv) this offering

   US$      US$  

Increase in net tangible book value attributable to the automatic conversion of all of our outstanding seed preferred shares, series A preference shares and series B preference shares and this offering

   US$      US$  

Amount of dilution in net tangible book value to new investors in the offering

   US$      US$  

A US$1.00 change in the assumed public offering price of US$             per ADS would, in the case of an increase, increase and, in the case of a decrease, decrease our pro forma as adjusted net tangible book value as described above by US$             million, the pro forma as adjusted net tangible book value per ordinary share and per ADS by US$             per ordinary share and by US$             per ADS, and the dilution per ordinary share and per ADS to new investors in this offering by US$             per ordinary share and US$             per ADS, respectively, assuming no change to the number of ADSs offered by us as set forth on the front cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of the ADSs and other terms of this offering determined at pricing.

The following table summarizes, on a pro forma as adjusted basis as of June 30, 2017, the differences between the existing shareholders as of June 30, 2017 and the new investors with respect to the number of ordinary shares (in the form of ADSs or ordinary shares) purchased from us in this offering, the total consideration paid and the average price per ordinary share paid and per ADS at an assumed initial public offering price of US$             per ADS before deducting underwriting discounts and commissions and estimated offering expenses payable by us. The total number of ordinary shares does not include ordinary shares underlying the ADSs issuable upon the exercise of the option to purchase additional ADSs which we granted to the underwriters.

 

    

 

Ordinary Shares Purchased

    Total Consideration     Average Price
Per Ordinary
Share
     Average
price per
ADS
 
     Number      Percent     Amount      Percent       
     (US$, except for share numbers and percentages)  

Existing shareholders

                                             

New investors

                                             
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

        100.0        100.0     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The discussion and tables above excludes:

 

    any exercise of any outstanding share options pursuant to the 2009 Plan as of June 30, 2017. See “Management—Share Incentive Plan” for details of these awards;

 

    the issuance of up to              Class A ordinary shares issuable upon conversion of outstanding convertible promissory notes in the aggregate principal amount of US$675 million after this offering at a conversion price ranging from US$             to US$            , which assumes an initial public offering price of US$             per ADS, the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus. See “Description of Share Capital—History of Securities Issuances—Convertible Promissory Notes.”

To the extent any of these awards are exercised or vested, there will be further dilution to new investors.

 

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ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the United States and provides less protection for investors. In addition, Cayman Islands companies do not have standing to sue before the federal courts of the United States.

Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our executive officers, directors and shareholders, be subject to arbitration.

Substantially all of our assets are located outside the United States. In addition, most of our directors and executive officers are nationals or residents of jurisdictions other than the United States and substantially all of their assets are located outside the United States. As a result, it may be difficult or impossible for you to effect service of process within the United States upon us or these persons, or to enforce judgments obtained in U.S. courts against us or them, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our executive officers and directors.

We have appointed Cogency Global Inc. as our agent to receive service of process with respect to any action brought against us in the U.S. District Court for the Southern District of New York in connection with this offering under the federal securities laws of the United States or of any State in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York in connection with this offering under the securities laws of the State of New York.

Cayman Islands

Maples and Calder (Hong Kong) LLP, our counsel as to Cayman Islands law, has advised us that there is uncertainty as to whether the courts of the Cayman Islands would (i) recognize or enforce judgments of U.S. courts obtained against us or our directors or executive officers that are predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (ii) entertain original actions brought in the Cayman Islands against us or our directors or executive officers that are predicated upon the securities laws of the United States or any state in the United States.

Maples and Calder (Hong Kong) LLP has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a competent foreign court with jurisdiction to give the judgment, (b) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (c) is final and conclusive, (d) is not in respect of taxes, a fine or a penalty; and (e) was not obtained in a manner and is not of a kind the enforcement of which is contrary

 

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to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.

Indonesia

Assegaf Hamzah & Partners, our counsel as to Indonesian law, has advised us that in Indonesia, foreign judgments are not enforceable in Indonesian courts and, as a result, it may not be possible to enforce judgments obtained in non-Indonesian courts against us. A foreign court judgment could be offered and accepted into evidence in a proceeding on the underlying claim in an Indonesian court and may be given such evidentiary weight as the Indonesian court may deem appropriate in its sole discretion. A claimant may be required to pursue claims in Indonesian courts on the basis of Indonesian law. Reexamination of the underlying claim de novo would be required before the Indonesian courts. There can be no assurance that the claims or remedies available under Indonesian laws will be the same or as extensive as those available in other jurisdictions.

Taiwan

LCS & Partners, our counsel as to Taiwan law, has informed us that any final judgment obtained against us, our directors or executive officers, or our Taiwan affiliated entities in any court other than the courts of Taiwan in respect of any legal suit or proceeding will be enforced by the courts of Taiwan without further review of the merits only if the court of Taiwan in which enforcement is sought is satisfied that: (i) the court rendering the judgment had jurisdiction over the subject matter according to the laws of Taiwan; (ii) the judgment and the legal procedures resulting in the judgment were not contrary to the public order or good morals of Taiwan; (iii) if the judgment was rendered by default by the court rendering the judgment, (a) we or such persons were duly served within a reasonable time in the jurisdiction of such court in accordance with the laws and regulations of such jurisdiction or (b) process was served on us or such persons with judicial assistance of Taiwan; and (iv) judgments of the courts of Taiwan would be recognized and enforceable in the jurisdiction of the court rendering the judgment on a reciprocal basis. Moreover, LCS & Partners has advised us that a party seeking to remit money in the process of enforcing a foreign judgment in Taiwan would, except under limited circumstances, be required to obtain foreign exchange approval from the Central Bank of the Republic of China (Taiwan) for the remittance out of Taiwan of any amounts recovered in respect of such judgment denominated in a currency other than New Taiwan Dollars.

Vietnam

Rajah & Tann LCT Lawyers, our counsel as to Vietnam law, has advised us that in Vietnam, a court will consider recognizing and enforcing a judgment rendered by a foreign court (i) where such judgment has been made in, or by the court of, a country which is a party to a relevant international treaty of which Vietnam is a participant or a signatory, (ii) where such judgment is permitted to be recognized and enforced under Vietnam law, or (iii) on a reciprocal basis without the condition that Vietnam and the relevant country are signatories or participants of a relevant international treaty. A judgment rendered by a foreign court will not be recognized and enforced in Vietnam where among other things, the Vietnam court in which the recognition and enforcement are requested determines that the recognition and enforcement of such judgment in Vietnam are contrary to the fundamental principles of Vietnam laws. There is doubt as to the enforceability in Vietnam courts in actions for the

 

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recognition and enforcement of judgments of United States courts and of civil liabilities predicated upon the federal securities laws of the United States, primarily because there is no treaty or other arrangement or basis for reciprocal enforcement of judgments between Vietnam and the United States. In addition, under Vietnam laws on investment, any dispute to which one disputing party is a foreign investor or a company with foreign owned capital, and any dispute between foreign investors shall only be resolved by (a) a Vietnam court, (b) a Vietnam arbitration body, (c) a foreign arbitration body, (d) an international arbitration body, or (e) an arbitration tribunal established pursuant to the agreement of the disputing parties. There is a possibility that parties to the disputes are not allowed to choose foreign courts as the dispute resolution forum.

Thailand

Hunton & Williams (Thailand) Limited, our counsel as to Thai law, has informed us that in Thailand, the courts do not recognize foreign judgments and require a new action to be filed. The foreign judgment will be rendered as evidence when conducting the litigation. With respect to filing an original action in Thailand, the general rule is that, if (i) the defendant has a domicile or conducts its business in Thailand or (ii) the grounds for the claim arose in Thailand, a plaintiff can file an original action with the Thai court regardless of nationality or domicile of the litigant. However, if (i) the defendant does not have a domicile in Thailand and (ii) the grounds for dispute did not arise in Thailand, the litigant can still file an original action in Thailand if the litigant has a domicile in Thailand or has Thai nationality.

Hunton & Williams (Thailand) Limited has advised us that if the claim arises from a breach of U.S. federal securities law, it will be regarded as a tortious claim in Thailand to which the law of the country where the tort was committed, namely the United States, would apply. However, the party who asserts the application of foreign law shall have a burden to prove the existence and application of such foreign laws to the satisfaction of the Thai court. If such party fails to do so, the Thai court has the discretion to apply the relevant Thai laws to the dispute. If the party can successfully prove the existence and application of such foreign laws to the satisfaction of the Thai court, the Thai court will apply such foreign laws to the extent that it is not contrary to the good morals and public order of Thailand.

The Thai court will assist the courts of other jurisdictions in processing their service of writs or pleadings through diplomatic channels, such as through the Thai Ministry of Foreign Affairs and Ministry of Justice.

Singapore

Rajah & Tann Singapore LLP, our counsel as to Singapore law, has informed us that in Singapore, a foreign judgment for a sum of money may be enforced in one of several ways, depending on where the foreign judgment is obtained. A foreign monetary judgment obtained in a competent court in the United States, including judgments relating to a violation of U.S. federal securities law, may form the basis for commencing an action in the Singapore courts to recover a debt if certain preconditions are met, including that the judgment is final and conclusive, based on the merits, not contrary to public policy, not obtained by fraud or in proceedings contrary to natural justice and the U.S. courts had jurisdiction to give that judgment. As such, assuming that the U.S. court had jurisdiction to hear and determine the original case and there are no grounds on which to impeach the judgment, the action in the Singapore courts may be successful without having to re-litigate the merits of the case.

An investor may not be able to commence an original action against us or our directors or executive officers, or any person, before the Singapore courts to enforce, either directly or indirectly, a U.S. judgment which concerns foreign criminal, venue or public laws. If the action requires the

 

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Singapore courts to decide on liabilities (in particular, criminal liabilities) under U.S. federal securities law, the Singapore courts are likely to decline jurisdiction to hear the action. Each claim or relief sought in the U.S. proceedings would have to be reviewed to determine if it is civil or criminal nature.

In addition, whether an action may be commenced in a Singapore court depends on whether the Singapore court has jurisdiction. The Singapore courts will consider, among other considerations, whether the parties have agreed by a jurisdictional clause to submit to the Singapore courts or whether there are sufficient connecting factors (including factors such as the proper law of the contract or the place in which the tort occurred) which point to Singapore being the most appropriate forum.

As such, Rajah & Tann Singapore LLP has advised us that there is uncertainty as to whether Singapore courts will entertain original actions predicated upon the securities laws of the United States or any state in the United States.

 

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CORPORATE HISTORY AND STRUCTURE

Corporate History

On May 8, 2009, we incorporated Garena Interactive Holding Limited, our holding company, as a limited liability company in the Cayman Islands. We first developed our digital entertainment business under the Garena brand, and as a result our Garena brand is most closely associated with online games. As our operations have expanded to include our digital financial services and e-commerce businesses, we believe it is important to have a name for our holding company that is more inclusive of all of our businesses. Therefore, on April 8, 2017, we changed our company name from Garena Interactive Holding Limited to Sea Limited.

We began our digital entertainment business at our inception in May 2009, and by September 2012, we had expanded the business to cover all of GSEA, including Indonesia, Taiwan, Vietnam, Thailand, the Philippines, Malaysia and Singapore.

We launched our e-commerce platform, Shopee, in all seven markets in GSEA in June and early July 2015.

We launched our digital financial services platform, AirPay, in Vietnam in April 2014. The AirPay App is available in Thailand, Vietnam and Taiwan, and AirPay counters are operating in Thailand, Vietnam, Indonesia and the Philippines.

Corporate Structure

Sea Limited is a holding company that does not have substantive operations. We conduct our businesses in GSEA through our subsidiaries and consolidated affiliated entities. Our principal subsidiaries and consolidated affiliated entities consist of the following entities (in chronological order based on their dates of incorporation):

 

    Garena Online Private Limited, our subsidiary established in Singapore on May 8, 2009, is an operating entity in our digital entertainment business in Singapore;

 

    Vietnam Esports Development Joint Stock Company, our VIE established in Vietnam on June 9, 2009, is an operating entity in our digital financial services business in Vietnam;

 

    Garena (Taiwan) Co., Ltd., our VIE established in Taiwan on March 8, 2010, is an operating entity in our digital entertainment business in Taiwan;

 

    Vietnam Esports and Entertainment Joint Stock Company, our VIE established in Vietnam on May 10, 2011, is an operating entity in our digital entertainment business in Vietnam;

 

    Garena Online (Thailand) Co., Ltd., our subsidiary established in Thailand on August 18, 2011, is an operating entity in our digital entertainment business in Thailand;

 

    Beetalk Private Limited, our subsidiary established in Singapore on May 28, 2012, is an operating entity in our online messaging business;

 

    PT. Garena Indonesia, our subsidiary established in Indonesia on December 6, 2012, is an operating entity in our digital entertainment business in Indonesia;

 

    Airpay (Thailand) Co., Ltd., our subsidiary established in Thailand on June 16, 2014, is an operating entity in our digital financial services business in Thailand;

 

    Shopee (Thailand) Co., Ltd., our subsidiary established in Thailand on February 2, 2015, is an operating entity in our e-commerce business in Thailand;

 

    Shopee Singapore Private Limited, our subsidiary established in Singapore on February 5, 2015, is an operating entity in our e-commerce business in Singapore;

 

    Shopee Company Limited, our subsidiary established in Vietnam on February 10, 2015, is an operating entity in our e-commerce business in Vietnam;

 

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    Garena Ventures Private Limited, our subsidiary established in Singapore on February 23, 2015, is our entity for making minority investments in GSEA;

 

    Shopee (Taiwan) Co., Ltd., our VIE established in Taiwan on March 4, 2015, is an operating entity in our e-commerce business in Taiwan; and

 

    PT. Shopee International Indonesia, our subsidiary established in Indonesia in on August 5, 2015, is an operating entity in our e-commerce business in Indonesia.

As of the date of this prospectus, we conduct our business operations across 60 subsidiaries and 21 consolidated affiliated entities.

 

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The chart below summarizes our corporate structure and identifies the principal subsidiaries and consolidated affiliate entities described above as of the date of this prospectus:

 

LOGO

 

 

 

  Direct ownership (or effective ownership in the case of our Thai entities)
- - - -   Contractual arrangements. See “—Contractual Arrangements among Our VIEs, Their Shareholders and Us.”
(1)   See “—Thailand Shareholding Structure.”
(2)   For each of these entities, 30% of the equity interest is owned by us through a wholly-owned subsidiary in Singapore, and the remaining 70% equity interest is controlled by us through contractual arrangements.
(3)   Held through a wholly-owned subsidiary in Singapore.

 

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Contractual Arrangements among Our VIEs, Their Shareholders and Us

The laws and regulations in many markets in GSEA, including Taiwan and Vietnam, place restrictions on foreign investment in and ownership of entities engaged in a number of business activities. For example, in Taiwan, PRC investors are prohibited or restricted from investing in businesses that have statutory business categories not listed as permitted in the Positive Listings promulgated by Taiwan authorities. Further, prior approval is required for PRC investors to invest in a Taiwan company that operates businesses in the statutory business categories listed as permitted in the Positive Listings. We do not believe, based on advice from our Taiwan counsel, LCS & Partners, that we are a PRC investor under existing Taiwan law and court judgments. This conclusion is based on our belief that, supported by advice from LCS & Partners, we are not controlled by or held as to more than 30% by any PRC investors and the fact that we are a Cayman Islands company, our headquarters is in Singapore, and the majority of our board of directors and our management team are Singaporean nationals. Tencent Holdings Limited, our principal shareholder which beneficially owned approximately 39.7% of our outstanding equity interest as of June 30, 2017, is a Cayman Islands company listed on the Hong Kong Stock Exchange. Although it is difficult to ascertain the exact shareholding of Tencent Holdings Limited by PRC investors as a publicly listed company, based on publicly available information, Tencent Holdings Limited has a significant public float and its largest shareholder is a South African company. Furthermore, based on publicly available information, the majority of Tencent Holdings Limited’s board members are non-PRC individuals. Accordingly, we believe that there is reasonable basis to conclude that we are not controlled by or held as to more than 30% by any PRC investors. However, we cannot be certain that Taiwan authorities will not take a different view, and cannot rule out the possibility that the Taiwan authorities will take action nor anticipate the outcome of such actions. See “Risk Factors—Risks Related to Doing Business in Greater Southeast Asia—Our businesses and operations in Taiwan may be materially and adversely impacted if we are deemed to be a PRC investor or if our VIE arrangements in Taiwan are deemed to be invalid or unenforceable or not in compliance with Taiwan laws.”

In Vietnam, foreign ownership in companies engaging in online game business may not exceed 49%, and foreign ownership in companies engaging in e-payment business is restricted unless certain government approvals are obtained. For a discussion of these restrictions, see “Regulations—Taiwan—Regulations on Foreign Investment” and “Regulations—Vietnam—Regulations on Foreign Investment.”

We have four material VIEs established and operating in Taiwan and Vietnam, namely Garena (Taiwan) Co., Ltd., Shopee (Taiwan) Co., Ltd., Vietnam Esports and Entertainment Joint Stock Company and Vietnam Esports Development Joint Stock Company. We entered into contractual arrangements with respect to our material Taiwan VIEs to minimize the potential for disruptions to our Taiwan operations should we be deemed a PRC investor. We entered into contractual arrangements with respect to our material Vietnam VIEs because they operate in businesses where foreign ownership is restricted under Vietnam laws or otherwise require approvals from multiple regulatory bodies, which approvals are often discretionary and may entail lengthy waiting periods. See “Risk Factors—Risks Related to Our Corporate Structure—We rely upon structural arrangements to establish control over certain entities and government authorities may determine that these arrangements do not comply with existing laws and regulations.” To the extent permissible by law, we will seek approval for obtaining, or enlarging our proportion of, direct ownership in these Vietnam operating entities. As of the date of this prospectus, we hold 30% of the equity interest in Vietnam Esports and Entertainment Joint Stock Company, the Vietnam VIE engaging in digital entertainment business, and 30% of the equity interest in Vietnam Esports Development Joint Stock Company, the Vietnam VIE engaging in digital financial services business.

We entered into a series of contracts with each of these VIEs and their respective shareholders, through which we are able to consolidate the financial results of these entities. The current shareholders of our material VIEs in Taiwan and Vietnam are our employees. We have chosen to work

 

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with our trusted long-time employees with local nationality as shareholders of our material VIEs in Taiwan and Vietnam. The shareholder of our Taiwan VIEs is currently serving as a senior director and was the general manager of our Taiwan business. The key shareholder of our Vietnam VIEs is currently serving as the legal representative of our Vietnam VIEs. Each of these employees has worked with us for over five years. Through the contractual arrangements, including the relevant powers of attorney, exclusive option agreements and equity interest pledge agreements, we maintain the ability to direct these shareholders to vote at our direction and have the ability to replace each of them as a VIE shareholder.

These contractual arrangements allow us to:

 

    exercise effective control over our VIEs;

 

    receive substantially all of the economic benefits and absorb losses of our VIEs; and

 

    have an exclusive call option to purchase all or part of the equity interests in and/or assets of our VIEs when and to the extent permitted by the relevant laws.

As a result of these contractual arrangements, we are the primary beneficiary of these VIEs and have consolidated their financial results in our consolidated financial statements in accordance with U.S. GAAP. However, these contractual arrangements may not be as effective in providing operational control as direct ownership and the use of the contractual arrangements in some jurisdictions where we operate exposes us to certain risks. See “Risk Factors—Risks Related to Our Corporate Structure.”

The following is a summary of the currently effective contractual arrangements by and among us, our material VIEs in Taiwan and Vietnam and their respective shareholders.

Contracts that Give Us Effective Control of the VIEs

Loan Agreements

In order to ensure that the shareholders of our material VIEs are able to provide capital to each of these entities in order to develop its business, we have entered into loan agreements with each shareholder. Pursuant to the loan agreements, we have granted loans to the shareholders that may only be used for the purpose of acquiring equity interests in or contributing to the registered capital of these entities. The time and manner for repayment of the loans are at the sole discretion of our lending entity. The loans may be repaid only by the shareholders transferring all of their equity interests in the VIE to us or our designee upon our exercise of the options under the exclusive option agreements. The loan agreements also prohibit the shareholders from assigning or transferring to any third party, or from creating or causing any security interest to be created on, any part of their equity interests in these entities. In the event that the shareholders sell their equity interests to us or our designee at a price which is equal to or lower than the principal amount of the loan, the loan will be interest-free. If the price is higher than the principal amount of the loans, the excess amount will be deemed to be interest on the loans payable by the shareholders to us.

Exclusive Option Agreements

In order to ensure that we are able to acquire all of the equity interests in our material VIEs at our discretion, we have entered into exclusive option agreements with the respective shareholders of these VIEs. Each option is exercisable by us at any time, provided that doing so is not prohibited by law. The exercise price under each option is the minimum amount required by law and any proceeds obtained by the respective shareholders through the transfer of their equity interests in these entities shall be used for the repayment of the loan provided by us in accordance with the loan agreements. During the terms of the exclusive option agreements, the shareholders will not grant a similar right or transfer any

 

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of the equity interests in these entities to any party other than us or our designee, nor will such shareholder pledge, create or permit any security interest or similar encumbrance to be created on any of the equity interests. According to the exclusive option agreements, the VIEs cannot declare any profit distributions or grant loans in any form without our prior consent. The shareholders must remit to us in full any funds such shareholders receive from the VIEs in the event any distributions are made by the VIEs. The exclusive option agreements will remain in effect until the respective shareholder has transferred all of such shareholder’s equity interests in the VIE entity to us or our designee.

Powers of Attorney

In order to ensure that we are able to make all of the decisions concerning our material VIEs, we have entered into powers of attorney with the shareholders of these VIEs. Pursuant to the powers of attorney, each shareholder of our material VIEs has irrevocably appointed us as such shareholder’s attorney-in-fact to act for all matters pertaining to such shareholder’s shareholding in the VIE entities and to exercise all of their rights as shareholders, including but not limited to attending shareholders’ meetings and designating and appointing directors, supervisors, the chief executive officer and other senior management members of these entities, and selling, transferring, pledging or disposing the shares of these entities. We may authorize or assign our rights under this appointment to any other person or entity at our sole discretion without prior notice to or prior consent from the shareholders of these entities. Each power of attorney will remain in effect until these shareholder ceases to hold any equity interest in the relevant VIE.

Equity Interest Pledge Agreements

In order to secure the performance of our material VIEs and their shareholders under the contractual arrangements, each of the shareholders of our VIEs have pledged all of their shares to us. These pledges secure the contractual obligations and indebtedness of such VIE shareholders, including all penalties, damages and expenses incurred by us in connection with the contractual arrangements, and all other payments due and payable to us by the relevant VIE under the exclusive business cooperation agreements, and by the VIE shareholders under the loan agreements, exclusive option agreements, and powers of attorney. Should the VIE or the VIE shareholder breach or default under any of the contractual arrangements, we have the right to require the transfer of such VIE shareholders’ pledged equity interests in the relevant VIE to us or our designee, to the extent permitted by laws, or require a sale of the pledged equity interest and have priority in any proceeds from the auction or sale of such pledged interests. Moreover, we have the right to collect any and all dividends in respect of the pledged equity interests during the term of the pledge. Unless the relevant VIEs have fully performed all of their obligations in accordance with the exclusive business cooperation agreements and the pledged equity interests have been fully transferred to us or our designee in accordance with the exclusive option agreements and the loan agreements, the equity interest pledge agreements will continue to remain in effect.

Spousal Consent Letters

Under the spousal consent letters, each spouse of the married shareholders of our material VIEs unconditionally and irrevocably agreed that the equity interest in the relevant entity held by and registered in the name of their spouse will be disposed of pursuant to the contractual arrangements. Each spouse agreed not to assert any rights over the equity interest in these entities held by their spouse. In addition, in the event that the spouses obtain any equity interest in these material entities held by their spouse for any reason, they agreed to be bound by the contractual arrangements.

All of the contractual arrangements as described above will be terminated once the respective shareholder has transferred all of such shareholder’s equity interests in the VIE entity to us or our designee.

 

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Contracts that Enable Us to Receive Economic Benefits or Absorb Losses from the VIEs

Exclusive Business Cooperation Agreement

In order to ensure that we receive the economic benefits of our material VIEs, we have entered into exclusive business cooperation agreements with these entities under which we have the exclusive right to provide or to designate any third party to provide, among other things, technical support, consulting services, intellectual property licenses and other services to these entities, and these entities agree to accept all the services provided by us or our designee. Without our prior written consent, our material VIEs are prohibited from directly or indirectly engaging any third party to provide the same or any similar services under these agreements or establishing similar cooperative relationships with any third party regarding the matters contemplated by these agreements. In addition, we have exclusive and proprietary ownership, rights and interests in any and all intellectual properties arising out of or created during the performance of these agreements.

Our material VIEs agree to pay a monthly fee to us at an amount determined at our sole discretion after taking into account factors including the complexity and difficulty of the services provided, the level of and time consumed by our employees or our designee for providing the services, the content and value of services and licenses provided and the market price of the same type of services or licenses. These agreements will remain effective unless terminated in accordance with their provisions or terminated in writing by us. Unless otherwise required by applicable laws, these entities do not have any right to terminate these agreements in any event. We have the right to terminate the exclusive business cooperation agreements and/or require these entities to indemnify all damages in the event of any material breach of any term of these agreements by them. These entities agree to indemnify and hold us harmless from any losses, injuries, obligations or expenses caused by any lawsuits, claims or other demands against us arising from or caused by the services that we provide to these entities pursuant to the exclusive business cooperation agreements, except where such losses, injuries, obligations or expenses arise from our own gross negligence or willful misconduct.

Financial Support Confirmation Letters

In order to ensure that our material VIEs have sufficient cash flow to fund their daily operations and/or to set off any losses incurred in such operations, we have entered into financial support confirmation letters with each of these entities. Under the financial support confirmation letters, we pledge to provide continuous financial support to these entities by ourselves or through our designees and agreed to forego our right to seek repayment in the event these entities are unable to repay such financial support or we become liable for the liabilities of these entities. These entities agree to accept such financial support and pledge to only use such support to develop their respective businesses. To the extent permitted by law, the financial support we provide to these entities may take the form of loans, borrowings or guarantees. According to our Taiwan counsel, LCS & Partners, subject to certain foreign exchange approval requirements in connection with the remittance of foreign currency in excess of certain amount by Taiwanese entities, there is generally no restriction or dollar amount limitation under Taiwan laws with respect to the financial support provided pursuant to the financial support confirmation letters. See “Regulation—Taiwan—Regulations on Foreign Exchange.” According to our Vietnam counsel, Rajah & Tann LCT Lawyers, there is generally no restriction or dollar amount limitation under Vietnam laws with respect to the financial support provided pursuant to the financial support confirmation letters, except that the financial support in the form of loans with a term of more than 12 months provided by offshore lenders to Vietnam entities must be registered with Vietnam authorities and must satisfy certain conditions with respect to the term, type and purpose of the loan. See “Regulation—Taiwan—Financial Support Provided by Offshore Entities” and “Regulation—Vietnam—Financial Support Provided by Offshore Entities.”

 

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In the opinion of each of LCS & Partners, our counsel as to Taiwan law, and Rajah & Tann LCT Lawyers, our counsel as to Vietnam law:

 

    the VIE structure in Taiwan and Vietnam, currently in effect and immediately after giving effect to this offering, do not and will not result in any violation of the laws or regulations currently in effect in either Taiwan or Vietnam; and

 

    the contractual arrangements among us, our VIEs in Taiwan and Vietnam and/or the shareholders governed by the laws of Taiwan or Vietnam, currently in effect and immediately after giving effect to this offering, are valid, binding and enforceable, and do not and will not result in any violation of such laws or regulations currently in effect.

However, uncertainties in the relevant legal system could cause the relevant regulatory authorities to find the current contractual arrangements and businesses to be in violation of any existing or future relevant laws or regulations. In addition, if the VIEs or the shareholders of the VIEs fail to perform their obligations under the contractual arrangements, we may have to incur substantial costs and expend resources to enforce our rights as the primary beneficiary under the contracts. See “Risk Factors—Risks Related to Our Corporate Structure.”

Thailand Shareholding Structure

Each of our operating entities in Thailand is established using a tiered structure that maximizes our equity interests in the entity while also complying with the Thai law requirement that each Thai company has at least three shareholders and, without approval from Thai authorities, direct foreign ownership of each entity operating the restricted business under the Thai Foreign Business Act is limited to less than 50%. As Thai laws only consider the immediate level of shareholding, no cumulative or look-through calculation is applied to determine the foreign ownership status of a company when it has several levels of foreign shareholding. Under this shareholding structure, our Thai operating entities are each owned by (i) a Thai entity, or Thai Holdco 1, holding slightly more than half of the shares, (ii) one of our employees holding one share, and (iii) one of our Cayman Islands subsidiaries holding slightly less than half of the shares. Thai Holdco 1 is then owned by (i) another Thai entity, or Thai Holdco 2, (ii) the employee who holds one share in the Thai operating entity, and (iii) our Cayman Islands subsidiary in the same shareholding proportions that our Thai operating entities are held. Thai Holdco 2 is in turn held by (i) one of our employees, who is a Thai citizen, holding preference shares equivalent to slightly more than half of the total number of shares, (ii) the employee who holds one share in the Thai operating entity, holding one share, and (iii) our Cayman Islands subsidiary holding ordinary shares equivalent to slightly less than half of the total number of shares. The preference shares have limited voting rights and the right to receive a fixed, non-cumulative dividend of an immaterial amount in the event a dividend is declared. This structure allows us to effectively control nearly 100% of our Thai operating entities.

In the opinion of Hunton & Williams (Thailand) Limited, our counsel as to Thai law, the shareholding structure of our Thai operating entities is in compliance with applicable Thai law. See “Risk Factors—Risks Related to Our Corporate Structure—We rely upon structural arrangements to establish control over certain entities and government authorities may determine that these arrangements do not comply with existing laws and regulations.”

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statements of operations data for the years ended December 31, 2014, 2015 and 2016 and selected consolidated balance sheet data as of December 31, 2014, 2015 and 2016 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. The selected consolidated statements of operations data for the six months ended June 30, 2016 and 2017 and selected consolidated balance sheet data as of June 30, 2017 have been derived from our unaudited interim condensed consolidated financial statements included elsewhere in this prospectus. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments, that we consider necessary for a fair statement of our financial position and operating results for the periods presented. Our historical results are not necessarily indicative of results expected for future periods. You should read this “Selected Consolidated Financial Data” section together with our consolidated financial statements and the related notes and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section included elsewhere in this prospectus.

 

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     For the Year Ended December 31,     For the Six
Months Ended
June 30,
 
               2014                         2015                         2016               2016     2017  
                      

(unaudited)

 
     (US$ thousands, except for share and per share data)  

Selected Consolidated Statements of Operations Data:

          

Revenue:

          

Digital entertainment

     155,075       281,963       327,985       159,400       179,045  

Others

     5,681       10,161       17,685       7,286       16,447  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     160,756       292,124       345,670       166,686       195,492  

Cost of revenue:

          

Digital entertainment

     (113,745     (160,267     (185,314     (91,520     (102,169

Others

     (10,828     (24,031     (47,284     (19,152     (40,375
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

     (124,573     (184,298     (232,598     (110,672     (142,544
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     36,183       107,826       113,072       56,014       52,948  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (expenses):

          

Other operating income

     742       3,063       2,103       1,321       381  

Sales and marketing expenses

     (68,787     (89,015     (187,372     (74,079     (137,985

General and administrative expenses

     (44,964     (87,202     (112,383     (43,145     (52,852

Research and development expenses

     (11,053     (17,732     (20,809     (9,432     (12,991
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (124,062     (190,886     (318,461     (125,335     (203,447
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (87,879     (83,060     (205,389     (69,321     (150,499

Interest income

     217       545       741       286       473  

Interest expense

     (181     (32     (23     (9     (8,997

Investment gain (loss), net

                 9,434       (484     (359

Foreign exchange gain (loss)

     365       (4,911     (1,649     (2,568     (789
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax and share of results of equity investees

     (87,478     (87,458     (196,886     (72,096     (160,171

Income tax expense

     (2,521     (11,730     (8,546     (6,071     (4,162

Share of results of equity investees

     (880     (8,148     (19,523     (8,960     (862
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (90,879     (107,336     (224,955     (87,127     (165,195

Net loss attributable to the non-controlling interests

     2,496       3,970       2,088       1,428       51  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Sea Limited’s ordinary shareholders

     (88,383     (103,366     (222,867     (85,699     (165,144
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     For the Year Ended December 31,     For the Six
Months Ended
June 30,
 
               2014                         2015                         2016               2016     2017  
                      

(unaudited)

 
     (US$ thousands, except for share and per share data)  

Loss per share:

          

Basic and diluted

     (0.67     (0.63     (1.30     (0.50     (0.94

Shares used in loss per share computation:

          

Basic and diluted

     131,744,413       164,625,286       171,127,788       170,680,188       174,988,779  

Pro-forma loss per share (unaudited):

          

Basic and diluted

         (0.87     (0.34     (0.63

Pro-forma weighted average number of ordinary shares outstanding (unaudited)(1):

          

Basic and diluted

         257,463,818       254,940,808       261,324,809  

Non-GAAP Financial Measures:

          

Adjusted net loss(2)

     (86,831     (86,772     (196,114     (73,917     (153,834

 

(1) Includes voting and non-voting ordinary shares.
(2) To see how we define and calculate adjusted net loss, a reconciliation between adjusted net loss and net loss (the most directly comparable U.S. GAAP financial measure) and a discussion about the limitations of non-GAAP financial measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures.”

 

     As of December 31,     As of
June 30,
 
     2014     2015      2016     2017  
                        (unaudited)  
     (US$ thousands)  

Selected Consolidated Balance Sheet Data:

         

Total current assets

     156,061       229,695        309,884       868,241  

Cash and cash equivalents

     85,996       116,203        170,078       651,060  

Prepaid expenses and other assets

     34,021       52,458        79,443       128,705  

Total non-current assets

     124,006       200,175        175,891       195,984  

Intangible assets, net

     29,367       50,857        29,963       24,260  

Long-term investments

     11,334       41,410        45,072       45,070  

Prepaid expenses and other assets

     25,462       39,465        32,299       47,027  

Deferred tax assets

     31,858       33,374        35,295       40,307  

Total assets

     280,067       429,870        485,775       1,064,225  

Total current liabilities

     208,907       244,345        263,756       333,754  

Accrued expenses and other payables

     29,716       42,147        102,086       140,647  

Advances from customers

     9,355       17,564        15,459       19,280  

Deferred revenue

     149,833       162,638        122,218       134,749  

Total non-current liabilities

     89,923       101,327        142,594       804,367  

Deferred revenue

     87,503       89,120        137,259       172,990  

Total liabilities

     298,830       345,672        406,350       1,138,121  

Total mezzanine equity

     10,500       10,500        205,075       205,075  

Total Sea Limited shareholders’ (deficit) equity

     (31,159     71,655        (125,670     (279,005

Total shareholders’ (deficit) equity

     (29,263     73,698        (125,650     (278,971

Total liabilities, mezzanine equity and shareholders’ equity

     280,067       429,870        485,775       1,064,225  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We believe we are the leading internet company in GSEA based on our number one market share by revenue in the region’s online game market, our number one market share by GMV and total orders in the region’s e-commerce market, and our position as a leader in the region’s digital payments market by e-wallet GTV, each in the first half of 2017.

Sea operates three key platforms—Garena, Shopee, and AirPay. Our Garena platform was number one in market share by revenue in the GSEA online game market in the first half of 2017, as estimated by Newzoo and Niko Partners. Our Shopee e-commerce platform was number one in market share in the first half of 2017 in GSEA by GMV and total orders, according to Frost & Sullivan. Our AirPay platform provides digital financial services and was the number one digital payments provider in GSEA in the first half of 2017 by e-wallet GTV, according to IDC. Each of our platforms provides a distinct and compelling value proposition to our users, and each also exhibits strong virtuous cycle dynamics. We believe these distinct characteristics support our leadership position and provide a strong foundation for continued growth while creating barriers to entry for our competitors. See “Our Market Opportunity” for a detailed discussion.

We curate and localize the content and services on our platforms to serve a highly diverse population across multiple markets and regulatory regimes. We believe our local knowledge, presence and focus provide us with a home court advantage in addressing the specific and unique opportunities and challenges in our region.

We have achieved significant scale and growth since our founding. Our total revenue increased from US$160.8 million in 2014 to US$345.7 million in 2016, a CAGR of 46.6%. Our total revenue increased by 17.3% from US$166.7 million in the six months ended June 30, 2016 to US$195.5 million in the same period in 2017. As our businesses grew, our gross profit increased from US$36.2 million in 2014 to US$113.1 million in 2016, a CAGR of 76.8%. Our gross profit decreased by 5.5% from US$56.0 million in the six months ended June 30, 2016 to US$52.9 million in the same period in 2017. We incurred net losses of US$90.9 million, US$107.3 million and US$225.0 million in 2014, 2015 and 2016, respectively, and US$87.1 million and US$165.2 million in the six months ended June 30, 2016 and 2017, respectively, due to our investments in expanding our businesses, in particular our e-commerce business.

Major Factors Affecting Our Results of Operations

Our results of operations and financial condition are affected by the general factors driving the digital entertainment, e-commerce, digital financial services and other industries in GSEA, including those factors described in “Our Market Opportunity—Key Thematic Drivers Across All of Our Businesses.”

 

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Our results of operations are also directly affected by certain factors specific to us, including the following:

Size of Our User Base

Our revenue is largely driven by the number of users and the level of user engagement across our three businesses. In our digital entertainment business, due to our freemium business model, the higher the number of active users on our platform, the larger the number of users likely to make in-game purchases. Likewise, in our e-commerce business, the larger the number of sellers and buyers on the platform, the larger the number and value of transactions which over time will drive advertising and commission revenue for us. Finally, in our digital financial services business, the larger the number of paying users and the larger the number of merchants accepting AirPay as a payment option, the greater the potential transaction volumes that drive our commission revenue.

User Engagement and Monetization

As our level of user engagement increases, the potential for user spending and consequently our revenue also increases. A critical component of maximizing the monetization potential of each of our businesses is providing high quality content and services and pricing our content and services correctly. Monetization is also dependent upon our ability to convert active users into paying users, and then increase revenue per paying user. For example:

 

    In our digital entertainment business, our primary source of revenue is the sale of in-game virtual items. We focus on curating the best content and localizing that content to cater to the tastes and preferences of each of our unique markets. We maximize the in-game user experience to keep our users highly engaged and increase the likelihood of in-game spending so as to maximize revenue. To do so, we provide a high-quality entertainment experience, adopt effective pricing strategies for each market and game, and leverage our platform’s cross-selling tools to support long-term user engagement with our games.

 

    In our e-commerce business, we closely monitor the number of transactions per active buyer. We optimize the assortment of our product categories on our marketplace and build convenient tools to attract sellers. We began monetizing our e-commerce business in 2017 in Taiwan and Indonesia by offering sellers a cost-per-click advertising service to feature and promote their products in search results generated by Shopee buyers, and by charging sellers in Taiwan commission fees for transactions completed on Shopee. As our e-commerce marketplace grows, we may consider other monetization methods in order to capture additional revenue streams.

 

    In our digital financial services business, we continually expand the number of use cases that accept AirPay as a payment option and also continually expand the number of AirPay counters to create greater convenience for our users. Increasing the variety of use cases and creating convenience for our users, together with our efforts to increase our AirPay App user numbers and engagement, increases the number of transactions through AirPay, and in turn GTV and commission income.

Optimization of Our Cost Structure

Our cost and expense structure has several broad components: payment channel costs, which are meaningful in our region; royalties, amortized license fees and hosting costs for our digital entertainment business; sales and marketing expenses, most prominently our customer acquisition and retention expenses in our e-commerce business; employee compensation and welfare costs and expenses, which are spread into different functions; and other costs and expenses across our businesses that are mainly fixed in nature.

 

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By launching AirPay in 2014, we effectively reduced our payment channel costs and captured value that previously went to third-party payment services. Our market leadership position in our digital entertainment business has enabled us to optimize our variable costs, as has our operating scale for e-commerce and digital financial services. Our third-party marketplace model for Shopee, which eliminates the need for physical warehouses and inventory, also meaningfully reduces our variable costs.

We have made a strategic decision to invest in the growth of our Shopee marketplace by incurring sales and marketing expenses in advance of our recent monetization efforts. We believe that taking a thoughtful approach to monetization by building our user base and increasing engagement first will allow us to maximize our monetization in the future. We have also invested significantly in our digital financial services business through sales and marketing expenses in order to increase our user base and deepen monetization.

Finally, as our total revenue continues to grow, we expect that overall fixed costs as a percentage of revenue will decrease. Our operating model allows us to centralize a number of functions, including research and development as well as general and administrative services, which are common across each of our businesses. This allows us to increase efficiencies across each business and further increase our overall operating leverage.

Benefits of Our Platforms

Our platforms benefit from internal dynamics that allow us to increase our scale and user engagement quickly and in a cost-effective manner. Our businesses enjoy network effects, virtuous cycles and linkages across our platforms.

We benefit from the network effects resulting from the significant social aspects of our digital entertainment and e-commerce platforms. For example, because game players find it highly beneficial to join a platform with a large number of other game players, each new player that joins creates value for the existing community. This encourages current users to invite new users to our platform, which allows us to grow our user base with moderate acquisition cost and increases the likelihood that users will remain active and engaged and therefore spend on our platform.

Each of our three businesses is a multi-sided platform which benefits from virtuous cycle dynamics. See “Our Market Opportunity—Key Thematic Drivers Across All of Our Businesses—Digital Transformation of Industries.” Thus, as our platforms grow, they become more valuable to each of our users and this increases their potential spending opportunities. For example, as the number of buyers on the Shopee platform increases, Shopee attracts an increasing number of sellers, resulting in increases in the volume and variety of products available on the platform, which increases the purchasing opportunities for each of those buyers. This results in greater monetization potential as the size of each platform grows.

Finally, linkages among our digital financial services business and each of our digital entertainment and e-commerce businesses allow us to increase our user base and monetization quickly and cost-effectively. As our Garena platform users and Shopee buyers increasingly complete transactions using AirPay, our AirPay user base will grow and become increasingly engaged.

 

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Description of Certain Statement of Operations Items

Revenue

We currently generate revenue primarily from our digital entertainment business. The table below sets forth revenue generated from our digital entertainment business and our other businesses.

 

    For the Year Ended December 31,     For the Six Months Ended June 30,  
    2014     2015     2016     2016     2017  
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
 
                                       

(unaudited)

 
    (thousands, except for percentages)  

Digital entertainment revenue

    155,075       96.5       281,963       96.5       327,985       94.9       159,400       95.6       179,045       91.6  

Other revenue

    5,681       3.5       10,161       3.5       17,685       5.1       7,286       4.4       16,447       8.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    160,756       100.0       292,124       100.0       345,670       100.0       166,686       100.0       195,492       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Geographically, our revenue in 2014, 2015, 2016 and for the six months ended June 30, 2017 was generated primarily from Indonesia, Taiwan, Vietnam and Thailand. The table below sets forth the revenue from external customers based on the geographical locations where the services were provided, both in absolute amount and as a percentage of total revenue for the periods indicated.

 

    For the Year Ended December 31,     For the Six Months Ended June 30,  
    2014     2015     2016     2016     2017  
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
 
                                       

(unaudited)

 
    (thousands, except for percentages)  

Indonesia

    607       0.4       9,601       3.3       23,023       6.7       11,204       6.7       12,647       6.5  

Taiwan

    47,892       29.8       101,731       34.8       109,652       31.7       60,531       36.3       56,914       29.1  

Vietnam

    17,589       10.9       45,809       15.7       61,354       17.7       24,335       14.6       37,816       19.3  

Thailand

    64,761       40.3       105,607       36.2       119,969       34.7       55,856       33.5       70,710       36.2  

Rest of the world

    29,907       18.6       29,376       10.0       31,672       9.2       14,760       8.9       17,405       8.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    160,756       100.0       292,124       100.0       345,670       100.0       166,686       100.0       195,492       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue from Indonesia increased from US$0.6 million in 2014 to US$23.0 million in 2016, a CAGR of 515.9%, and increased by 12.9% from US$11.2 million in the six months ended June 30, 2016 to US$12.6 million in the same period in 2017. Revenue from Taiwan increased from US$47.9 million in 2014 to US$109.7 million in 2016, a CAGR of 51.3%, and decreased by 6.0% from US$60.5 million in the six months ended June 30, 2016 to US$56.9 million in the same period in 2017. Revenue from Vietnam increased from US$17.6 million in 2014 to US$61.4 million in 2016, a CAGR of 86.8%, and increased by 55.4% from US$24.3 million in the six months ended June 30, 2016 to US$37.8 million in the same period in 2017. Revenue from Thailand increased from US$64.8 million in 2014 to US$120.0 million in 2016, a CAGR of 36.1%, and increased by 26.6% from US$55.9 million in the six months ended June 30, 2016 to US$70.7 million in the same period in 2017. The increases in revenue across our markets were primarily due to the increase of digital entertainment revenue

 

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arising from the success and growth of our new and existing games. Other revenue is largely attributable to revenue from the growth of GTV transacted on our digital financial services platform, where applicable, as well as other revenue sources which are not expected to be significant in the future.

Digital Entertainment

We generate revenue from our digital entertainment business primarily by selling in-game virtual items to our game players. We recognize revenue ratably over the estimated delivery obligation period. Our revenue generated from digital entertainment accounted for 96.5%, 96.5%, 94.9% and 91.6% of our total revenue in 2014, 2015, 2016 and for the six months ended June 30, 2017, respectively. Our digital entertainment business constitutes the vast majority of our total revenue largely because our other businesses were launched later and have not been fully monetized. We anticipate that as we further monetize our other businesses, the percentage of revenue from our digital entertainment business will continue to decrease, even though we expect the total amount of revenue generated from our digital entertainment business to continue to grow.

The primary driver for revenue growth in our digital entertainment business is the size of our active user base and the level of user engagement. Due to the freemium business model of our immersive games, the higher the number of active users on our platform, the greater the likelihood of such users to make in-game purchases. Therefore, we believe QAU is a key metric to help us understand both the active user base and user engagement on our platform. For example, our QAUs increased from 31.0 million to 44.7 million, 50.4 million and 64.2 million from the fourth quarter of 2014 to the fourth quarter of 2015 and 2016 and the second quarter of 2017, respectively, which led to an increase in the number of paying users, which in turn contributed significantly to our revenue growth during those periods. User base growth and engagement are primarily driven by the launch of new games, the expansion of existing games into new markets, and the improvement and launch of new content in our existing games. See “Business—Garena Digital Entertainment Platform—Ecosystem Participants—Game Players.”

Other Revenue

Other revenue consists primarily of revenue generated from our digital financial services business and other services on our platforms. Our other revenue constituted 3.5%, 3.5%, 5.1% and 8.4% of our total revenue during 2014, 2015, 2016 and the six months ended June 30, 2017, respectively.

We generate revenue from our digital financial services business primarily from processing payments from our users to merchants on our platform. Users can make payments either through an AirPay counter or by using our AirPay App. We generally recognize our commission from the transactions as revenue, which is a certain percentage of the transaction value flowing through the platform. We started to monetize our digital financial services business in late 2014, and anticipate that as our user base and merchant network continue to expand, the percentage of revenue attributable to our digital financial services business will increase. Revenue from our digital financial services business is directly affected by the following key metrics:

 

    Number of Counters.    The number of counters is largely affected by the demand among digital financial services users for counter services and our ability to recruit new counter operators.

 

    Monthly Active Users on the AirPay App.    Our MAUs on the AirPay App are largely driven by the popularity of the services offered on the AirPay App, in particular the mix and popularity of merchants on our platform.

 

   

Number of Transactions.    Transactions on our digital financial services platform can be conducted either using the AirPay e-wallet via one of our counters or through the AirPay App,

 

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or as payment processing for Shopee. The number of transactions is largely affected by the mix and popularity of the services offered and the number of active users. As the variety of use cases and the number of users increase, there will be increased convenience and opportunities for users to use our platform to complete transactions.

 

    GTV.    GTV is largely a function of the mix of merchants on our platform and use cases as well as the number and level of engagement of our digital financial services users. We charge commissions on certain transactions as a percentage of GTV. Thus, as either the rate of these commissions or GTV, or both, increase, so does our revenue.

The MAUs on the AirPay App increased from 185.0 thousand in December 2015 to 298.7 thousand in December 2016 and 909.6 thousand in June 2017; the number of e-wallet transactions increased from 70.4 million in 2015 to 133.6 million in 2016 and increased from 56.3 million in the first half of 2016 to 87.1 million in the first half of 2017; the number of registered AirPay counters increased from 68.2 thousand as of December 31, 2015 to 144.7 thousand as of December 31, 2016 and 177.9 thousand as of June 30, 2017; and the total AirPay GTV transacted on the platform increased from US$198.1 million in 2015 to US$614.4 million in 2016 and increased from US$199.6 million in the first half of 2016 to US$670.0 million in the first half of 2017, which contributed to our revenue growth.

We began monetizing our e-commerce business in 2017 in Taiwan and Indonesia by offering sellers a cost-per-click advertising service to feature and promote their products in search results generated by Shopee buyers, and by charging sellers in Taiwan commission fees for transactions completed on Shopee. We may also consider other means of generating revenue in the future, such as tiered commission fees based on product categories charged to sellers.

Cost of Revenue

Our cost of revenue primarily consists of direct expenses in generating revenue from our businesses.

For our cost of revenue for digital entertainment, the largest portion relates to payments made to game developers as upfront licensing fees, which are fixed and amortized over the game licensing period, and royalties, which are generally paid as a percentage of gross billings from the game. Other costs include channel costs, server and hosting costs, staff compensation and welfare costs, which include share-based compensation, and other miscellaneous costs.

Other cost of revenue items primarily relate to bank transaction fees for transactions conducted through both our e-commerce and digital financial services platforms, commissions we pay to counter operators, server and hosting costs, staff compensation and welfare costs, which include share-based compensation, and other miscellaneous costs.

We expect our total cost of revenue to increase as our revenue increases in the future, though we expect the increase to be slower than that of total revenue due to economies of scale.

 

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Operating Income and Expenses

Our operating expenses consist of sales and marketing expenses, general and administrative expenses and research and development expenses, net of other operating income. The table below sets forth our operating expenses, both in absolute amount and as a percentage of total revenue, for the periods indicated.

 

    For the Year Ended December 31,     For the Six Months Ended June 30,  
    2014     2015     2016     2016     2017  
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
 
                                       

(unaudited)

 
    (thousands, except for percentages)  

Other operating income

    (742     (0.5     (3,063     (1.0     (2,103     (0.6     (1,321     (0.8     (381     (0.2

Sales and marketing expenses

    68,787       42.8       89,015       30.5       187,372       54.2       74,079       44.4       137,985       70.6  

General and administrative expenses

    44,964       28.0       87,202       29.9       112,383       32.5       43,145       25.9       52,852       27.0  

Research and development expenses

    11,053       6.9       17,732       6.1       20,809       6.0       9,432       5.7       12,991       6.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    124,062       77.2       190,886       65.3       318,461       92.1    

 

 

 

125,335

 

 

 

 

 

 

75.2

 

 

 

 

 

 

203,447

 

 

    104.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Operating Income

Our other operating income consists primarily of sponsorship from partners who participate in our events and tournaments and other miscellaneous income that are individually insignificant.

Sales and Marketing Expenses

Our sales and marketing expenses consist primarily of online and offline advertising expenses, promotion expenses, and staff compensation and welfare expenses, which include share-based compensation for our employees engaged in sales and marketing functions. We plan to continue investing in sales and marketing to grow our user base and increase user engagement on our platforms, and to continue building brand awareness. As a result, we expect sales and marketing expenses to increase for the foreseeable future as we grow our business, though over the long-term as a percentage of total revenue we expect it to decrease as revenue increases as a result of prior marketing and promotional campaigns.

General and Administrative Expenses

Our general and administrative expenses consist primarily of facilities and other overhead expenses, depreciation and amortization expenses, impairment losses, external professional service expenses, and staff compensation and welfare expenses, which include share-based compensation for our employees engaged in general and administrative functions. We expect our general and administrative expenses to increase for the foreseeable future as we grow our business, as well as to cover the additional expenses associated with being a publicly-listed company.

 

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Research and Development Expenses

Our research and development expenses consist primarily of staff compensation and welfare expenses, which include share-based compensation for our employees engaged in product development functions. We believe continued investment in developing our platforms is extremely important to achieving our strategic objectives. As a result, we expect our research and development expenses to increase for the foreseeable future as we grow our business.

Results of Operations

The table below sets forth a summary of our consolidated results of operations for the periods indicated, both in absolute amounts and as percentages of our total revenue. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.

 

    For the Year Ended December 31,     For the Six Months Ended June 30,  
    2014     2015     2016     2016     2017  
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
 
                                       

(unaudited)

 
    (thousands, except for percentages)  

Revenue:

                   

Digital entertainment

    155,075       96.5       281,963       96.5       327,985       94.9       159,400       95.6       179,045       91.6  

Others

    5,681       3.5       10,161       3.5       17,685       5.1       7,286       4.4       16,447       8.4  
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total revenue

    160,756       100.0       292,124       100.0       345,670       100.0       166,686       100.0       195,492       100.0  

Cost of revenue:

                   

Digital entertainment

    (113,745     (70.8     (160,267     (54.9     (185,314     (53.6     (91,520     (54.9     (102,169     (52.3

Others

    (10,828     (6.7     (24,031     (8.2     (47,284     (13.7     (19,152     (11.5     (40,375     (20.7
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total cost of revenue

    (124,573     (77.5     (184,298     (63.1     (232,598     (67.3     (110,672     (66.4     (142,544     (72.9
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Gross profit

    36,183       22.5       107,826       36.9       113,072       32.7       56,014       33.6       52,948       27.1  
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Operating income (expenses):

                   

Other operating income

    742       0.5       3,063       1.0       2,103       0.6       1,321       0.8       381       0.2  

Sales and marketing expenses

    (68,787     (42.8     (89,015     (30.5     (187,372     (54.2     (74,079     (44.4     (137,985     (70.6

General and administrative expenses

    (44,964     (28.0     (87,202     (29.9     (112,383     (32.5     (43,145     (25.9     (52,852     (27.0

Research and development expenses

    (11,053     (6.9     (17,732     (6.1     (20,809     (6.0     (9,432     (5.7     (12,991     (6.6
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total operating expenses

    (124,062     (77.2     (190,886     (65.3     (318,461     (92.1     (125,335     (75.2     (203,447     (104.0
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Operating loss

    (87,879     (54.7     (83,060     (28.4     (205,389     (59.4     (69,321     (41.6     (150,499     (76.9

Interest income

    217       0.1       545       0.2       741       0.2       286       0.2       473       0.2  

Interest expense

    (181     (0.1     (32     (0.0 )*      (23     (0.0 )*      (9     (0.0 )*      (8,997     (4.6

Investment gain (loss), net

                            9,434       2.7       (484     (0.3     (359     (0.2

Foreign exchange gain (loss)

    365       0.2       (4,911     (1.7     (1,649     (0.5     (2,568     (1.5     (789     (0.4
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Loss before income tax and share of results of equity investees

    (87,478     (54.4     (87,458     (29.9     (196,886     (57.0     (72,096     (43.3     (160,171     (81.9

Income tax expense

    (2,521     (1.6     (11,730     (4.0     (8,546     (2.5     (6,071     (3.6     (4,162     (2.1

Share of results of equity investees

    (880     (0.5     (8,148     (2.8     (19,523     (5.6     (8,960     (5.4     (862     (0.4
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Net loss

    (90,879     (56.5     (107,336     (36.7     (224,955     (65.1     (87,127     (52.3     (165,195     (84.4
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Adjusted net loss(1)

    (86,831     (54.0     (86,772     (29.7     (196,114     (56.7     (73,917     (44.3     (153,834     (78.7

 

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* Less than 0.1%
(1) To see how we define and calculate adjusted net loss, a reconciliation between adjusted net loss and net loss (the most directly comparable U.S. GAAP financial measure) and a discussion about the limitations of non-GAAP financial measures, see “—Non-GAAP Financial Measures” below.

Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016

Revenue

Our total revenue increased by 17.3%, from US$166.7 million in the six months ended June 30, 2016 to US$195.5 million in the same period in 2017. This increase was due to increases in revenue from our digital entertainment, digital financial services and other businesses.

 

    Digital Entertainment Revenue. Our digital entertainment revenue increased by 12.3%, from US$159.4 million in the six months ended June 30, 2016 to US$179.0 million in the same period in 2017. This increase was primarily due to the growth of our user base from QAUs of 46.4 million in the second quarter of 2016 to 64.2 million in the second quarter of 2017, as we launched new games and expanded our existing games into new markets, which in turn increased the number of paying users.

 

    Other Revenue. Our other revenue increased by 125.7%, from US$7.3 million in the six months ended June 30, 2016 to US$16.4 million in the same period in 2017. The increase was primarily due to the growth of our digital financial services business as well as other businesses. MAUs on AirPay App increased from 290.0 thousand in June 2016 to 909.6 thousand in June 2017 as we added use cases and further deepened our market penetration, and the number of registered AirPay counters increased from 112.9 thousand as of June 30, 2016 to 177.9 thousand as of June 30, 2017 as we expanded the number of counters in Thailand, Vietnam, Indonesia and the Philippines. As a result, the GTV completed on our digital financial services platform increased from US$199.6 million during the first half of 2016 to US$670.0 million during the first half of 2017.

Cost of Revenue

Our total cost of revenue increased by 28.8%, from US$110.7 million in the six months ended June 30, 2016 to US$142.5 million in the same period in 2017. This increase was primarily due to the increases in cost of revenue from our digital entertainment, e-commerce and digital financial services businesses. Our total cost of revenue as a percentage of total revenue increased from 66.4% in the six months ended June 30, 2016 to 72.9% in the same period in 2017.

 

    Cost of Revenue for Digital Entertainment. Our cost of revenue for digital entertainment increased by 11.6%, from US$91.5 million in the six months ended June 30, 2016 to US$102.2 million in the same period in 2017. The increase was primarily due to increased royalty payments to game developers as well as other costs directly associated with our business which were in line with the increasing revenue in our digital entertainment business.

 

    Other Cost of Revenue. Our other cost of revenue increased by 110.8%, from US$19.2 million in the six months ended June 30, 2016 to US$40.4 million in the same period in 2017. The increase was primarily due to increased payments to counter operators and other costs directly associated with our increased revenue from our digital financial services business, higher bank transaction fees relating to the increase in GMV for our e-commerce business, as well as higher staff compensation and benefit costs.

Gross Profit

As a result of the foregoing, our gross profit was US$56.0 million and US$52.9 million in the six months ended June 30, 2016 and 2017, respectively. We had gross margins of 33.6% and 27.1% in

 

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the six months ended June 30, 2016 and 2017, respectively, and our digital entertainment business had gross margins of 42.6% and 42.9% in the six months ended June 30, 2016 and 2017, respectively.

Sales and Marketing Expenses

Our sales and marketing expenses increased by 86.3%, from US$74.1 million in the six months ended June 30, 2016 to US$138.0 million in the same period in 2017. This increase was primarily due to significant marketing efforts to grow our e-commerce business, primarily through promotions, which include subsidies for shipping, in order to increase our user base and enhance user engagement. During the six months ended June 30, 2016 and 2017, sales and marketing expenses relating to our digital entertainment business accounted for 26.6% and 16.6% of our total sales and marketing expenses, respectively, while sales and marketing expenses relating to our e-commerce business accounted for 62.0% and 73.8%, respectively.

General and Administrative Expenses

Our general and administrative expenses increased by 22.5%, from US$43.1 million in the six months ended June 30, 2016 to US$52.9 million in the same period in 2017. This increase was primarily due to the expansion of our staff force, the increase in office facilities and its related expenses, as well as the increase in professional fees and other expenses.

Research and Development Expenses

Our research and development expenses increased by 37.7%, from US$9.4 million in the six months ended June 30, 2016 to US$13.0 million in the same period in 2017, primarily due to an increase in research and development staff force as we expanded and enriched our product offerings.

Other Income, Expenses, Gains and Losses

Our net interest income, interest expense, investment loss, net and foreign exchange loss was a net loss of US$9.7 million in the six months ended June 30, 2017, compared to a net loss of US$2.8 million in the same period in 2016. The change was primarily attributable to an increase in interest expense of US$9.0 million accrued for convertible promissory notes that we issued in the six months ended June 30, 2017, partially offset by the decrease in foreign exchange loss of US$1.8 million in the six months ended June 30, 2017.

Loss before Income Tax and Share of Results of Equity Investees

As a result of the foregoing, we had loss before income tax and share of results of equity investees of US$72.1 million and US$160.2 million in the six months ended June 30, 2016 and 2017, respectively.

Income Tax Expense

We had income tax expense of US$6.1 million and US$4.2 million in the six months ended June 30, 2016 and 2017, respectively. Our income tax expenses in the six months ended June 30, 2016 and 2017, despite a US$72.1 million and US$160.2 million loss before income tax, respectively, was primarily caused by withholding tax expense as well as unrecognized deferred tax assets arising from losses in our new businesses.

 

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Share of Results of Equity Investees

We had share of losses of equity investees of US$9.0 million and US$0.9 million in the six months ended June 30, 2016 and 2017, respectively, arising from the operating results of our equity investees in the respective year.

Net Loss

As a result of the foregoing, we had net loss of US$87.1 million and US$165.2 million in the six months ended June 30, 2016 and 2017, respectively.

Adjusted Net Loss

Adjusted net loss, which is net loss adjusted to remove share-based compensation expense, was US$73.9 million and US$153.8 million in the six months ended June 30, 2016 and 2017, respectively. For a discussion of the limitations associated with using adjusted net loss rather than U.S. GAAP measures and a reconciliation to net income, see “—Non-GAAP Financial Measures.”

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Revenue

Our total revenue increased by 18.3%, from US$292.1 million in 2015 to US$345.7 million in 2016. This increase was due to increases in revenue from our digital entertainment, digital financial services and other businesses.

 

    Digital Entertainment Revenue.    Our digital entertainment revenue increased by 16.3%, from US$282.0 million in 2015 to US$328.0 million in 2016. This increase was primarily due to the growth of our user base from QAUs of 44.7 million in the fourth quarter of 2015 to 50.4 million in the fourth quarter of 2016, as we launched new games and expanded our existing games into new markets, which in turn increased the number of paying users.

 

    Other Revenue.    Our other revenue increased by 74.0%, from US$10.2 million in 2015 to US$17.7 million in 2016. The increase was primarily due to the growth of our digital financial services business as well as other businesses. The number of registered AirPay counters increased from 68.2 thousand as of December 31, 2015 to 144.7 thousand as of December 31, 2016 as we expanded the number of counters in Thailand, Vietnam and Indonesia, while MAUs on AirPay App in December 2015 and 2016 increased from 185.0 thousand to 298.7 thousand, respectively, as we added use cases and further expanded our market penetration. As a result, the GTV completed on our digital financial services platform increased from US$198.1 million during 2015 to US$614.40 million during 2016.

Cost of Revenue

Our total cost of revenue increased by 26.2%, from US$184.3 million in 2015 to US$232.6 million in 2016. This increase was primarily due to the increases in cost of revenue from our digital entertainment, e-commerce and digital financial services businesses. Our total cost of revenue as a percentage of total revenue increased from 63.1% in 2015 to 67.3% in 2016.

 

    Cost of Revenue for Digital Entertainment.    Our cost of revenue for digital entertainment increased by 15.6%, from US$160.3 million in 2015 to US$185.3 million in 2016. The increase was primarily due to increased royalty payments to game developers as well as other costs directly associated with our business which were in line with the increasing revenue in our digital entertainment business.

 

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    Other Cost of Revenue.    Our other cost of revenue increased by 96.8%, from US$24.0 million in 2015 to US$47.3 million in 2016. The increase was primarily due to increased payments to counter operators and other costs directly associated with our increased revenue from our digital financial services business, higher bank transaction fees relating to the increase in GMV for our e-commerce business that we started in June 2015, as well as higher staff compensation and benefit costs.

Gross Profit

As a result of the foregoing, our gross profit was US$107.8 million in 2015 and US$113.1 million in 2016. We had gross margins of 36.9% and 32.7% in 2015 and 2016, respectively, and our digital entertainment business had gross margins of 43.2% and 43.5% in 2015 and 2016, respectively.

Sales and Marketing Expenses

Our sales and marketing expenses increased by 110.5%, from US$89.0 million in 2015 to US$187.4 million in 2016. This increase was primarily due to significant marketing efforts to grow our e-commerce business, primarily through promotions, which include subsidies for shipping, in order to increase our user base and enhance user engagement. During 2016, sales and marketing expenses relating to our digital entertainment and e-commerce businesses accounted for 23.5% and 67.4% of our total sales and marketing expenses, respectively.

General and Administrative Expenses

Our general and administrative expenses increased by 28.9%, from US$87.2 million in 2015 to US$112.4 million in 2016. This increase was primarily due to the expansion of our staff force, the increase in office facilities and its related expenses, a write-off of prepaid licensing fees and impairment of intangible assets, as well as the increase in professional fees and other expenses.

Research and Development Expenses

Our research and development expenses increased by 17.4%, from US$17.7 million in 2015 to US$20.8 million in 2016, primarily due to an increase in research and development staff force as we expanded and enriched our product offerings.

Other Income, Expenses, Gains and Losses

Our net interest income, interest expense, investment gain, net and foreign exchange gain (loss) was a net gain of US$8.5 million in 2016, compared to a net loss of US$4.4 million in 2015. The change was primarily attributable to a net investment gain of US$9.4 million in 2016 and a decrease in foreign exchange loss of US$3.3 million. Net investment gain in 2016 was mainly attributable to the disposal of an investment, partially offset by an impairment loss of other investments. Foreign exchange losses in 2015 and 2016 were mainly attributable to settled and unsettled financial assets and liabilities denominated in foreign currencies within our subsidiaries.

Loss before Income Tax and Share of Results of Equity Investees

As a result of the foregoing, we had loss before income tax and share of results of equity investees of US$196.9 million in 2016, compared to US$87.5 million in 2015.

Income Tax Expense

We had income tax expense of US$11.7 million in 2015 and US$8.5 million in 2016. Our income tax expenses in 2015 and 2016, despite a US$87.5 and US$196.9 million loss before income tax, was

 

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primarily caused by withholding tax expense as well as unrecognized deferred tax assets arising from losses in our new businesses.

Share of Results of Equity Investees

We had share of losses of equity investees of US$8.1 million in 2015 and US$19.5 million in 2016, respectively, arising from the operating results of our equity investees in the respective year.

Net Loss

As a result of the foregoing, we had net loss of US$107.3 million in 2015 and US$225.0 million in 2016.

Adjusted Net Loss

Adjusted net loss, which is net loss adjusted to remove share-based compensation expense, was US$86.8 million in 2015 and US$196.1 million in 2016. For a discussion of the limitations associated with using adjusted net loss rather than U.S. GAAP measures and a reconciliation to net income, see “—Non-GAAP Financial Measures.”

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

Revenue

Our total revenue increased by 81.7%, from US$160.8 million in 2014 to US$292.1 million in 2015. This increase was due to increases in revenue from each of our digital entertainment, digital financial services and other services.

 

    Digital Entertainment Revenue.    Our digital entertainment revenue increased by 81.8%, from US$155.1 million in 2014 to US$282.0 million in 2015. This increase was primarily due to the growth of our user base, from QAUs of 31.0 million in the fourth quarter of 2014 to 44.7 million in the fourth quarter of 2015, as we launched new games and expanded our existing games into new markets, which in turn increased the number of paying users.

 

    Other Revenue.    Our other revenue increased by 78.9%, from US$5.7 million in 2014 to US$10.2 million in 2015. This increase was primarily due to the initial ramp-up of our digital financial services business as well as the growth of our other businesses. We began our digital financial services operations in April 2014 and had 68.2 thousand registered AirPay counters as of December 31, 2015, 185.0 thousand MAUs on the AirPay App in December 2015 and US$198.1 million GTV completed on our digital financial services platform during 2015.

Cost of Revenue

Our total cost of revenue increased by 47.9%, from US$124.6 million in 2014 to US$184.3 million in 2015. This increase was primarily due to increases in cost of revenue from our digital entertainment business and our other businesses. Our total cost of revenue as a percentage of total revenue decreased from 77.5% in 2014 to 63.1% in 2015.

 

    Cost of Revenue for Digital Entertainment.    Our cost of revenue for digital entertainment increased by 40.9%, from US$113.7 million in 2014 to US$160.3 million in 2015. The increase was primarily due to increased royalty payments to game developers as well as other costs directly associated with our business which were in line with the increasing revenue in our digital entertainment business.

 

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    Other Cost of Revenue.    Our other cost of revenue increased by 121.9%, from US$10.8 million in 2014 to US$24.0 million in 2015. The increase was primarily due to increased payments to counter operators and other costs directly associated with our increased revenue from our digital financial services business, higher bank transaction fees relating to increases in GMV for our e-commerce business that we started in June 2015, as well as larger staff compensation and benefit costs.

Gross Profit

As a result of the foregoing, our gross profit increased by 198.0%, from US$36.2 million in 2014 to US$107.8 million in 2015. We had gross margins of 22.5% and 36.9%, and our digital entertainment business had gross margins of 26.7% and 43.2% in 2014 and 2015, respectively.

Sales and Marketing Expenses

Our sales and marketing expenses increased by 29.4%, from US$68.8 million in 2014 to US$89.0 million in 2015. This increase was primarily due to marketing efforts to grow our digital entertainment, e-commerce and digital financial services businesses.

General and Administrative Expenses

Our general and administrative expenses increased by 93.9%, from US$45.0 million in 2014 to US$87.2 million in 2015. This increase was primarily due to the expansion of our staff force, increases in office facilities and expenses, impairment and write-off of intangible assets as well as an increase in professional fees and other expenses.

Research and Development Expenses

Our research and development expenses increased by 60.4%, from US$11.1 million in 2014 to US$17.7 million in 2015, primarily due to increases in research and development staff force as we expanded and enriched our product offerings.

Other Income, Expense, Gains and Losses

Our net interest income, interest expense and foreign exchange gain (loss) was a net gain of US$0.4 million in 2014, compared to a net loss of US$4.4 million in 2015. The change was primarily attributable to a change in foreign exchange gain (loss) from a gain of US$0.4 million in 2014 to a loss of US$4.9 million in 2015. Foreign exchange loss in 2015 was mainly attributable to settled and unsettled financial assets and liabilities denominated in foreign currencies within our subsidiaries.

Loss before Income Tax and Share of Results of Equity Investees

As a result of the foregoing, we had loss before income tax and share of results of equity investees of US$87.5 million in both 2014 and 2015.

Income Tax Expense

We had income tax expense of US$2.5 million in 2014 and US$11.7 million in 2015. Our income tax expenses in 2014 and 2015, in spite of a US$87.5 million loss before income tax in both years, were primarily caused by withholding tax expense as well as unrecognized deferred tax assets arising from losses in our new businesses.

 

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Share of Results of Equity Investees

We had a share of losses of equity investees of US$0.9 million in 2014 and US$8.1 million in 2015, respectively, arising from the operating results of our equity investees in the respective year.

Net Loss

As a result of the foregoing, we had net loss of US$90.9 million in 2014 and US$107.3 million in 2015.

Adjusted Net Loss

Adjusted net loss was US$86.8 million in 2014 and US$86.8 million in 2015. For a discussion of the limitations associated with using adjusted net loss rather than U.S. GAAP measures and a reconciliation to net income, see “—Non-GAAP Financial Measures.”

 

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Selected Quarterly Results of Operations

The following tables set forth our unaudited consolidated statements of operations data for each of the six quarters from January 1, 2016 to June 30, 2017, both in absolute amounts and as percentages of our total revenue, as well as our consolidated deferred revenue from our digital entertainment business as of the end of each of the six quarters from January 1, 2016 to June 30, 2017 in absolute amounts, which was unaudited as of the end of each quarter except that the amount as of December 31, 2016 was audited. The unaudited quarterly consolidated statements of operations data set forth below have been prepared on the same basis as our audited consolidated financial statements and includes all adjustments, consisting of normal recurring adjustments, that we consider necessary for a fair statement of our financial position and operating results for the periods presented. Our historical results are not necessarily indicative of results expected for future periods. You should read this selected quarterly results of operations section together with our audited consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    For the Three Months Ended  
    March 31,
2016
    June 30,
2016
    September 30,
2016
    December 31,
2016
    March 31,
2017
    June 30,
2017
 
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
 
   

(unaudited)

 
    (thousands, except for percentages)  

Unaudited Consolidated Statements of Operations Data:

   

Revenue:

                       

Digital entertainment

    73,318       95.8       86,082       95.5       86,178       95.2       82,407       93.2       87,586       93.2       91,459       90.1  

Others

    3,242       4.2       4,044       4.5       4,345       4.8       6,054       6.8       6,359       6.8       10,088       9.9  
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total revenue

    76,560       100.0       90,126       100.0       90,523       100.0       88,461       100.0       93,945       100.0       101,547       100.0  

Cost of revenue:

                       

Digital entertainment

    (46,732     (61.0     (44,788     (49.7     (46,496     (51.4     (47,298     (53.5     (49,277     (52.5     (52,892     (52.1

Others

    (8,158     (10.7     (10,994     (12.2     (12,253     (13.5     (15,879     (18.0     (17,561     (18.7     (22,814     (22.5
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total cost of revenue

    (54,890     (71.7     (55,782     (61.9     (58,749     (64.9     (63,177     (71.4     (66,838     (71.1     (75,706     (74.6
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Gross profit

    21,670       28.3       34,344       38.1       31,774       35.1       25,284       28.6       27,107       28.9       25,841       25.4  
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Operating income (expenses):

                       

Other operating income

    462       0.6       859       1.0       367       0.4       415       0.5       218       0.2       163       0.2  

Sales and marketing expenses

    (27,600     (36.1     (46,479     (51.6     (51,530     (56.9     (61,763     (69.8     (63,898     (68.0     (74,087     (73.0

General and administrative expenses

    (22,443     (29.3     (20,702     (23.0     (27,934     (30.9     (41,304     (46.7     (25,208     (26.8     (27,644     (27.2

Research and development expenses

    (4,569     (6.0     (4,863     (5.4     (5,591     (6.2     (5,786     (6.5     (6,252     (6.7     (6,739     (6.6
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Total operating expenses

    (54,150     (70.7     (71,185     (79.0     (84,688     (93.6     (108,438     (122.6     (95,140     (101.3     (108,307     (106.7
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Operating loss

    (32,480     (42.4     (36,841     (40.9     (52,914     (58.5     (83,154     (94.0     (68,033     (72.4     (82,466     (81.2

Interest income

    100       0.1       186       0.2       184       0.2       271       0.3       144       0.2       329       0.3  

Interest expense

    (6     (0.0     (3     (0.0     (5     (0.0     (9     (0.0     (2,250     (2.4     (6,747     (6.6

Investment gain (loss), net

    (432     (0.6     (52     (0.1     (5,103     (5.6     15,021       17.0       (225     (0.2     (134     (0.1

Foreign exchange (loss) gain

    (386     (0.5     (2,182     (2.4     1,052       1.2       (133     (0.2     (148     (0.2     (641     (0.6
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Loss before income tax and share of results of equity investees

    (33,204     (43.4     (38,892     (43.2     (56,786     (62.7     (68,004     (76.9     (70,512     (75.1     (89,659     (88.3

Income tax expense

    (1,830     (2.4     (4,241     (4.7     (3,522     (3.9     1,047       1.2       (1,932     (2.1     (2,230     (2.2

Share of results of equity investees

    (3,155     (4.1     (5,805     (6.4     (5,284     (5.8     (5,279     (6.0     (632     (0.7     (230     (0.2
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Net loss

    (38,189     (49.9     (48,938     (54.3     (65,592     (72.5     (72,236     (81.7     (73,076     (77.8     (92,119     (90.7
 

 

 

     

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Adjusted net loss(1)

    (30,455     (39.8     (43,462     (48.2     (60,217     (66.5     (61,980     (70.1     (66,963     (71.3     (86,871     (85.5

 

     As of  
     March 31,
2016
     June 30,
2016
     September 30,
2016
     December 31,
2016
     March 31,
2017
     June 30,
2017
 
    

(US$ thousands)

 

Deferred revenue from digital entertainment(2)

     269,209        260,929        257,947        258,894        283,328        305,881  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) To see how we define and calculate adjusted net loss, a reconciliation between adjusted net loss and net loss (the most directly comparable U.S. GAAP financial measure) and a discussion about the limitations of non-GAAP financial measures, see “—Non-GAAP Financial Measures” below.
(2) Substantially all of our deferred revenue as of December 31, 2015 were from our digital entertainment business.

 

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The growth of our quarterly total revenue overall was primarily driven by the growth of our digital entertainment, digital financial services and other businesses. We are subject to fluctuations in quarterly results as a result of the fluctuations in consumer demand for mobile and PC online games during certain months and holidays. Timing of new game releases in different markets in GSEA and the timing of the promotional and marketing activities also contributed to the fluctuations in quarterly results. In addition, deferred revenue for our digital entertainment business is subject to fluctuations as it is primarily driven by the estimated service delivery obligation period, which is mainly determined by users’ usage patterns and playing behaviors. We believe providing information regarding deferred revenue for our digital entertainment business is helpful in understanding trends in our ability to generate revenue on a quarterly basis, given that the deferred revenue will be recognized in future periods. See “Critical Accounting Policies—Revenue Recognition—Digital Entertainment” for a description of our revenue recognition policy in our digital entertainment business.

Our cost of revenue increased in absolute value as a result of the growth in our businesses, but decreased as a percentage of total revenue during the second and third quarters primarily due to economies of scale and changes in respective game revenue contribution, partially offset by the cost increase in growing and expanding our e-commerce and digital financial services businesses. Our sales and marketing expenses increased both in absolute value and also as a percentage of total revenue over the five quarters primarily because we expended significant marketing efforts to grow our e-commerce business, primarily through promotions, which include subsidies for shipping, in order to increase our user base and enhance user engagement. Our general and administrative expenses were higher in the fourth quarter of 2016 relative to other quarters primarily due to higher share-based compensation expenses, impairment and write-off of intangible assets as well as an increase in professional fees. Over the same period, our adjusted net loss increased generally due to a combination of the above reasons.

The factors described above and the short operating history of some of our businesses make it difficult for us to accurately identify recurring seasonal trends in our business. Accordingly, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. See “Risk Factors—Risks Related to Our Business—Our results of operations are subject to fluctuations.”

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, we use adjusted net loss, a non-GAAP financial measures, as described below, to understand and evaluate our core operating performance. This non-GAAP financial measure, which may differ from similarly titled measures used by other companies, is presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP.

Adjusted net loss is defined as net loss excluding share-based compensation expense. We believe that adjusted net loss provides useful information to investors and others in understanding and evaluating our operating results. This non-GAAP financial measure eliminates the impact of items that we do not consider indicative of the performance of our business. While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for the related financial information prepared in accordance with U.S. GAAP.

 

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The tables below present reconciliations of adjusted net loss to net loss, the most directly comparable U.S. GAAP financial measure, for the periods indicated.

 

    For the Year Ended
December 31,
    For the Three
Months Ended
 
    2014     2015     2016     March 31,
2016
    June 30,
2016
    September 30,
2016
    December 31,
2016
    March 31,
2017
    June 30,
2017
 
                      (unaudited)  
    (US$ thousands)  

Net loss

    (90,879     (107,336     (224,955     (38,189     (48,938     (65,592     (72,236     (73,076     (92,119

Add: Share-based compensation

    4,048       20,564       28,841       7,734    

 

5,476

 

    5,375       10,256       6,113       5,248  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net loss

    (86,831     (86,772     (196,114     (30,455     (43,462     (60,217     (61,980     (66,963     (86,871
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The use of adjusted net loss has material limitations as an analytical tool, as adjusted net loss does not include all items that impact our net loss or income for the period and share-based compensation is a recurring significant expense. In addition, because this non-GAAP measure may not be calculated in the same manner by all companies, it may not be comparable to other similar titled measures used by other companies.

Segment Reporting

We have three reportable segments, namely, digital entertainment, e-commerce and digital financial services. The chief operating decision maker reviews the performance of each segment based on revenue and certain key operating metrics of the operations and uses these results for the purposes of allocating resources to and evaluating the financial performance of each segment.

The table below sets forth revenue generated from each segment, both in absolute amount and as a percentage of total revenue, for the periods indicated.

 

    For the Year Ended December 31,     For the Six Months Ended June 30,  
    2014     2015     2016     2016     2017  
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
    US$     Percentage
of Total
Revenue
 
                                       

(unaudited)

 
    (US$ thousands, except for percentages)  

Digital entertainment

    155,075       96.5       281,963       96.5       327,985       94.9       159,400       95.6       180,119       92.1  

E-commerce(1)

                                                    1,185       0.6  

Digital financial services

    181       0.1       9,003       3.1       19,721       5.7       7,217       4.3       19,395       9.9  

All others(2)

    5,500       3.4       8,318       2.8       11,832       3.4       4,945       3.0       7,881       4.0  

Inter-segment(3)

                (7,160     (2.4     (13,868     (4.0     (4,876     (2.9     (13,088     (6.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    160,756       100.0       292,124       100.0       345,670       100.0       166,686       100.0       195,492       100.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) We began monetizing our e-commerce business in 2017.
(2) All others include revenue from interactive live streaming services, sale of merchandise in offline marketing and eSports events and other income.
(3) Inter-segment represents cross segment revenue generated primarily from our digital financial services business in providing services to our digital entertainment and e-commerce businesses.

For a period-to-period analysis of our segment revenue for digital entertainment and digital financial services, see “—Results of Operations” for details.

 

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Liquidity and Capital Resources

Cash Flows and Working Capital

Our principal sources of liquidity have been investments from our shareholders through private placements and cash generated from operating activities. For details of the private placements of our securities in the last three years, see “Description of Share Capital—History of Securities Issuances.”

As of December 31, 2014, 2015 and 2016 and June 30, 2017, we had US$86.0 million, US$116.2 million, US$170.1 million and US$651.1 million, respectively, in cash and cash equivalents. Cash and cash equivalents consist of cash on hand and demand deposits placed with banks or other financial institutions which are unrestricted as to withdrawal and use and have original maturities less than three months. Our cash and cash equivalents are primarily denominated in U.S. Dollars as well as in local currencies of the markets where we operate. We intend to finance our future working capital requirements and capital expenditures from cash generated from operating activities, funds raised from financing activities, including the net proceeds we will receive from this offering. We believe that our current available cash and cash equivalents will be sufficient to meet our working capital requirements and capital expenditures in the ordinary course of business for the next twelve months without considering the proceeds from this offering.