PREM14A 1 s114856_prem14a.htm PREM14A

   

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION  

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the  

Securities Exchange Act of 1934

 

Filed by the Registrant  ☐ Filed by a Party other than the Registrant  ☐

 

Check the appropriate box:

   

Preliminary Proxy Statement

   

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

   

Definitive Proxy Statement

   

Definitive Additional Materials

   

Soliciting Material under §240.14a-12

 

CM SEVEN STAR ACQUISITION

CORPORATION

(Name of Registrant as Specified In Its Charter) 

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

   

No fee required.

   

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

      

  (1)Title of each class of securities to which transaction applies:

 

   Ordinary shares, par value $.0001 per share (“Ordinary Shares”)
    

  (2)Aggregate number of securities to which transaction applies:

 

33,000,000 ordinary shares (which includes 4,715,700 shares underlying an equity incentive plan) of CM Seven Star Acquisition Corporation to be issued to Renren Inc. pursuant to that certain Share Exchange Agreement, dated November 2, 2018, by and among CM Seven Star Acquisition Corporation, a Cayman Islands company, Kaixin Auto Group, a Cayman Islands company, and Renren Inc., a Cayman Islands company.  

                  

  (3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

The proposed maximum aggregate value of the transaction was calculated based on the high and low bid price for the ordinary shares on November 12, 2018 ($10.074).

    

(4)Proposed maximum aggregate value of transaction:

 

$332,442,000

       

(5)Total fee paid: $40,291.97
   

 

Fee paid previously with preliminary materials.

   

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

     

(1)Amount Previously Paid:

       

(2)Form, Schedule or Registration Statement No.:

       

(3)Filing Party:

         

(4)Date Filed:

 

 

 

 

PROXY STATEMENT FOR EXTRAORDINARY GENERAL MEETING OF SHAREHOLDERS
OF CM SEVEN STAR ACQUISITION CORPORATION

 

Proxy Statement dated [●], 2019
and first mailed to shareholders on or about [●], 2019

 

Dear Shareholders:

 

You are cordially invited to attend the extraordinary general meeting of CM Seven Star’s shareholders. CM Seven Star is a Cayman Islands exempted company incorporated as a blank check company for the purpose of entering into a merger, share exchange, asset acquisition, share purchase, recapitalization, reorganization or similar business combination with one or more businesses or entities, which we refer to as a “target business.”

 

Holders of the ordinary shares of CM Seven Star will be asked to approve the share exchange agreement, dated as of November 2, 2018, or the “Share Exchange Agreement”, by and among CM Seven Star, Kaixin Auto Group (“Kaixin”) and Renren Inc. (the “Seller”), and the other related proposals. The Seller owns 100% of the issued and outstanding shares in or of Kaixin.

 

Upon the closing of the transactions contemplated in the Share Exchange Agreement, CM Seven Star will acquire 100% of the issued and outstanding securities of Kaixin, in exchange for approximately 28.3 million ordinary shares of CM Seven Star. An additional 4.7 million shares of CM Seven Star will be issued at closing in exchange for currently outstanding options in Kaixin or reserved for issuance under an equity incentive plan. Additionally, 19.5 million earnout shares are to be issued and held in escrow. The Seller may be entitled to receive earnout shares as follows: (1) if the Company’s gross revenue for the year ended December 31, 2019 is greater than or equal to RMB 5,000,000,000, the Seller is entitled to receive 1,950,000 ordinary shares of CM Seven Star; (2) if the Company’s adjusted EBITDA for the year ended December 31, 2019 is greater than or equal to RMB 150,000,000, the Seller is entitled to receive 3,900,000 ordinary shares of CM Seven Star, increasing proportionally to 7,800,000 ordinary shares if Company’s adjusted EBITDA is greater than or equal to RMB 200,000,000; and (3) if the Company’s adjusted EBITDA for the year ended December 31, 2020 is greater than or equal to RMB 340,000,000, the Seller is entitled to receive 4,875,000 ordinary shares of CM Seven Star, increasing proportionally to 9,750,000 ordinary shares if the Company’s adjusted EBITDA is greater than or equal to RMB 480,000,000. The definition of adjusted EBITDA is set forth on page 15 of this proxy statement.

 

Notwithstanding the Revenue and Adjusted EBITDA achieved by the post-transaction company for any period, Renren will receive the 2019 earnout shares if the stock price of CM Seven Star is higher than $13.00 for any sixty days in any period of ninety consecutive trading days during an fifteen month period following the closing, and will receive the 2019 earnout shares and the 2020 earnout shares if the stock price of CM Seven Star is higher than $13.50 for any sixty days in any period of ninety consecutive trading days during a thirty month period following the closing.

 

The transactions contemplated under the Share Exchange Agreement relating to the business combination are referred to in this proxy statement as the “Business Combination.”

 

As of [●], 2019, there was approximately $[●] in CM Seven Star’s trust account. On [●], 2019, the record date for the extraordinary general meeting of shareholders, the last sale price of CM Seven Star’s ordinary shares was $[●].

 

Each shareholder’s vote is very important. Whether or not you plan to attend the CM Seven Star extraordinary general meeting in person, please submit your proxy card without delay. Shareholders may revoke proxies at any time before they are voted at the meeting. Voting by proxy will not prevent a shareholder from voting in person if such shareholder subsequently chooses to attend the CM Seven Star extraordinary general meeting.

 

We encourage you to read this proxy statement carefully. In particular, you should review the matters discussed under the caption “Risk Factors” beginning on page 18.

 

 

 

 

CM Seven Star’s board of directors unanimously recommends that CM Seven Star shareholders vote “FOR” approval of each of the proposals.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in the Business Combination or otherwise, or passed upon the adequacy or accuracy of this proxy statement. Any representation to the contrary is a criminal offense.

 

Sing Wang  
Chief Executive Officer of  
CM Seven Star Acquisition Corporation  

 

[●], 2019

 

 

 

 

HOW TO OBTAIN ADDITIONAL INFORMATION

 

This proxy statement incorporates important business and financial information about CM Seven Star that is not included or delivered herewith. If you would like to receive additional information or if you want additional copies of this document, agreements contained in the appendices or any other documents filed by CM Seven Star with the Securities and Exchange Commission, such information is available without charge upon written or oral request. Please contact the following:

 

Suite 1306, 13/F, AIA Central, Connaught Road

Central, Hong Kong
Telephone: +852 3796 2750

 

If you would like to request documents, please do so no later than [●], 2019 to receive them before CM Seven Star’s extraordinary general meeting. Please be sure to include your complete name and address in your request. Please see “Where You Can Find Additional Information” to find out where you can find more information about CM Seven Star and Kaixin. You should rely only on the information contained in this proxy statement in deciding how to vote on the Business Combination. Neither CM Seven Star, Kaixin nor the Seller has authorized anyone to give any information or to make any representations other than those contained in this proxy statement. Do not rely upon any information or representations made outside of this proxy statement. The information contained in this proxy statement may change after the date of this proxy statement. Do not assume after the date of this proxy statement that the information contained in this proxy statement is still correct.

 

USE OF CERTAIN TERMS

 

Unless otherwise stated in this proxy statement, references in this proxy statement to:

 

“Average selling price” are to aggregate gross selling price of Kaixin’s cars to customers in a given period, divided by the total number of cars sold in the same period. These car sales transactions are recognized as auto sales revenue in full for cars sold out of Kaixin’s inventory, and proportionally for cars sourced by Kaixin Affiliated Network Dealers that Kaixin’s Dealerships sell subject to profit-sharing agreements;

 

“CAGR” are to compound annual growth rate;

 

“car parc” are to the total number of light vehicles, including cars, sport utility vehicles and light trucks in a region or market at a specific point in time;

 

China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this proxy statement only, Taiwan, the Hong Kong Special Administrative Region and the Macao Special Administrative Region;

 

“CM Seven Star,” “we,” “us” or “our company” are to CM Seven Star Acquisition Corporation;

 

“Dealerships” are to Kaixin’s dealership businesses operated by special purpose holding companies in which Kaixin possesses majority ownership and voting control;

 

“Dealership Outlets” are to retail premises operated by Kaixin’s Dealerships;

 

“GMV” are to gross merchandise value of car sales transactions as measured by gross selling price, excluding service fees unrelated to the sales; GMV includes the full sales price of cars Kaixin sells as well as cars sourced from Kaixin Affiliated Network Dealers. These car sales transactions are recognized as auto sales revenue in full for cars sold out of Kaixin’s inventory, and proportionally for cars sourced by Kaixin Affiliated Network Dealers that Kaixin’s Dealerships sell subject to profit-sharing agreements;

 

“Loan Facilitation Volume” are to aggregate principal amount of car financing loans extended for a given period. As Kaixin is not the lender for such transactions, it recognizes origination fees as other revenues;

 

 

 

 

“Kaixin” are to Kaixin Auto Group, a wholly-owned subsidiary of the Seller, and its subsidiaries and consolidated affiliated entities, as the context requires; and depending on the context, may also include the platform partners within Kaixin’s network;

 

“Kaixin Affiliated Network Dealers” are to other in-network dealers who provide automobile inventory to Kaixin’s Dealerships and which are marketed pursuant to profit-sharing arrangements with Kaixin;

 

“other in-network dealers” are to other dealerships with which Kaixin has commercial relationships, including consumer financing referrals or who are users of Kaixin’s Dealer SaaS platform;

 

“Plans” are to the Shanghai Renren Finance Leasing Asset-Backed Special Plans, which Kaixin consolidates in its financial statements;

 

“RMB” or “Renminbi” are to the legal currency of China;

 

“Renren” or the “Seller” are to Renren Inc., and its subsidiaries and consolidated affiliated entities, as the context requires;

 

“SaaS” are to “software-as-a-service;”

 

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

 

“U.S. GAAP” are to accounting principles generally accepted in the United States; and

 

“variable interest entity” or “VIE” are to Kaixin’s variable interest entities, Shanghai Qianxiang Changda Internet Information Technologies Development Co., Ltd., or Qianxiang Changda, and Shanghai Jieying Auto Retail Co., Ltd., or Shanghai Jieying, which are 100% owned by PRC citizens and a PRC entity owned by PRC citizens. Shanghai Jieying possesses an ICP license to operate value-added telecommunications business; Each of the VIEs is consolidated into Kaixin’s consolidated financial statements in accordance with U.S. GAAP as if they were its wholly-owned subsidiaries.

 

The reporting currency of each of CM Seven Star and Kaixin is the U.S. dollar. This proxy statement also contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at RMB6.5063 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 29, 2017. We make no representation that the Renminbi or U.S. dollar amounts referred to in this proxy statement could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On January [ ], 2019, the noon buying rate for Renminbi was RMB[__] to US$1.00.

 

 

 

 

CM SEVEN STAR ACQUISITION CORPORATION

 

Suite 1306, 13/F, AIA Central, Connaught Road

Central, Hong Kong

Attn: Sing Wang
Telephone: +852 3796 2750

 

NOTICE OF EXTRAORDINARY GENERAL MEETING OF
CM SEVEN STAR ACQUISITION CORPORATION SHAREHOLDERS
To Be Held on [●], 2019

 

To CM Seven Star Acquisition Corporation (“CM Seven Star”) Shareholders:

 

An extraordinary general meeting of shareholders of CM Seven Star will be held at [●], on [●], 2019, at [●] a.m., for the following purposes:

 

●          To approve the Share Exchange Agreement and the transactions contemplated thereunder, including but not limited to the acquisition of all of the issued and outstanding shares and any other equity interests of Kaixin from the Seller, as provided for in the Share Exchange Agreement and the consideration paid to the Seller and the earn-out consideration by way of new issue of ordinary shares credited as fully paid in accordance with the Share Exchange Agreement, or the “Business Combination.” This proposal is referred to as the “Business Combination Proposal” or “Proposal No. 1.”

 

●          To approve increase in the number of authorized ordinary shares to [___] and removal of the class of preferred shares. This proposal is referred to as the “Authorized Share Increase Proposal” or “Proposal No. 2.”

 

●          To approve as a special resolution the change of CM Seven Star’s name to Kaixin Auto Holdings and the adoption of the Second Amended and Restated Memorandum and Articles of Association of CM Seven Star as further described herein. This proposal is referred to as the “Amendment Proposal” or “Proposal No. 3.”

 

●          To approve the issuance of more than 20% of the issued and outstanding ordinary shares of CM Seven Star pursuant to the terms of the Share Exchange Agreement, as required by Nasdaq Listing Rules 5635(a) and (d). This proposal is referred to as the “Nasdaq Proposal” or “Proposal No. 4.”

 

●          To approve the 2018 CM Seven Star Equity Incentive Plan. This proposal is referred to as the “Equity Incentive Plan Proposal” or “Proposal No. 5.”

 

●          To approve the adjournment of the extraordinary general meeting in the event CM Seven Star does not receive the requisite shareholder vote to approve the Business Combination. This proposal is called the “Business Combination Adjournment Proposal” or “Proposal No. 6.”

 

Proposals 1 through 6 are sometimes collectively referred to herein as the “Proposals.”

 

As of [●], 2019, there were [●] ordinary shares of CM Seven Star issued and outstanding and entitled to vote. Only CM Seven Star shareholders who hold ordinary shares of record as of the close of business on [●], 2019 are entitled to vote at the extraordinary general meeting or any adjournment of the extraordinary general meeting. This proxy statement is first being mailed to shareholders on or about [●], 2019. Approval of the Business Combination Proposal, the Nasdaq Proposal, the Equity Incentive Plan Proposal and the Business Combination Adjournment Proposal will each require the affirmative vote of the holders of a majority of the issued and outstanding ordinary shares present and entitled to vote at the extraordinary general meeting or any adjournment thereof; provided, however, that if [●] or more of the ordinary shares purchased in the IPO demand redemption of their ordinary shares, then the Business Combination will not be completed. Approval of the Authorized Share Increase Proposal and the Amendment Proposal will require the affirmative vote of the holders of two-thirds of the issued and outstanding ordinary shares present and entitled to vote at the extraordinary general meeting. Attending the extraordinary general either in person or by proxy and abstaining from voting will have the same effect as voting against all the Proposals and, assuming a quorum is present, broker non-votes will have no effect on any of the Proposals.

 

 

 

 

CM Seven Star currently has authorized share capital of 202,000,000 shares consisting of 200,000,000 ordinary shares with a par value of $0.0001 per share and 2,000,000 preferred shares with a par value of $0.0001 per share.

 

Holders of CM Seven Star’s ordinary shares will not be entitled to appraisal rights under Cayman Islands law in connection with the Business Combination.

 

Whether or not you plan to attend the extraordinary general meeting in person, please submit your proxy card without delay to [___] not later than the time appointed for the extraordinary general meeting or adjourned meeting. Voting by proxy will not prevent you from voting your shares in person if you subsequently choose to attend the extraordinary general meeting. If you fail to return your proxy card and do not attend the meeting in person, the effect will be that your shares will not be counted for purposes of determining whether a quorum is present at the extraordinary general meeting. You may revoke a proxy at any time before it is voted at the extraordinary general meeting by executing and returning a proxy card dated later than the previous one, by attending the extraordinary general meeting in person and casting your vote by ballot or by submitting a written revocation to CM Seven Star at CM Seven Star Acquisition Corporation, Suite 1306, 13/F, AIA Central, Connaught Road, Central, Hong Kong, Attention: Sing Wang, Telephone: +852 3796 2750, that is received by us before we take the vote at the extraordinary general meeting. If you hold your shares through a bank or brokerage firm, you should follow the instructions of your bank or brokerage firm regarding revocation of proxies.

 

CM Seven Star’s board of directors unanimously recommends that CM Seven Star shareholders vote “FOR” approval of each of the Proposals.

 

By order of the Board of Directors,

 

Sing Wang  
Chief Executive Officer of  
CM Seven Star Acquisition Corporation  

 

[__________], 2019

 

 

 

 

TABLE OF CONTENTS

 

    PAGE
       
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS FOR CM SEVEN STAR shareholders   1  
DELIVERY OF DOCUMENTS TO CM SEVen Star’s shareholders   6  
SUMMARY OF THE PROXY STATEMENT   7  
PRICE RANGE OF SECURITIES AND DIVIDENDS   17  
RISK FACTORS   18  
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS   67  
Extraordinary general MEETING OF CM Seven star SHAREHOLDERS   69  
THE BUSINESS COMBINATION PROPOSAL   75  
THE BUSINESS COMBINATION ADJOURNMENT PROPOSAL   126  
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA OF KAIXIN AUTO GROUP   127  
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION   132  
KAIXIN AUTO GROUP’s BUSINESS   145  
Overview   167  
Basis of Presentation      
Reorganization Transactions      
SELECTED HISTORICAL FINANCIAL INFORMATION OF CM SEVEN STAR   222  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION   223  
CM Seven Star’S BUSINESS   225  
DIRECTORS, EXECUTIVE OFFICERS, EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE   229  
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT   235  
Security Ownership of the Combined Company after the BUSINESS COMBINATION   236  
CERTAIN TRANSACTIONS   237  
DESCRIPTION OF CM Seven Star’S SECURITIES   245  
EXPERTS   250  
SHAREHOLDER PROPOSALS AND OTHER MATTERS   250  
WHERE YOU CAN FIND ADDITIONAL INFORMATION   250  

 

ANNEX A –SHARE EXCHANGE AGREEMENT
ANNEX B –INVESTOR RIGHTS AGREEMENT 
ANNEX C –FORM OF TRANSITIONAL AGREEMENTS 
ANNEX D –FORM OF SECOND AMENDED AND RESTATED MEMORANDUM AND ARTICLES OF ASSOCIATION OF CM SEVEN STAR 
ANNEX E –FORM OF 2018 EQUITY INCENTIVE PLAN

 

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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS FOR CM SEVEN STAR shareholders

 

Q:What is the purpose of this document?

 

A:           CM Seven Star Acquisition Corporation, a Cayman Islands company, or CM Seven Star, and Renren Inc., a Cayman Islands company (the “Seller”), have agreed to a business combination under the terms of a Share Exchange Agreement, dated as of November 2, 2018, by and among CM Seven Star, the Seller and Kaixin Auto Group, a Cayman Islands company and wholly-owned subsidiary of the Seller, and the other related proposals. The consummation of the transactions contemplated by the Share Exchange Agreement are referred to as the Business Combination and the proposal to approve the Business Combination is referred to as the Business Combination Proposal. The Share Exchange Agreement is attached to this proxy statement as Annex A, and is incorporated into this proxy statement by reference. You are encouraged to read this proxy statement, including “Risk Factors” and all the annexes hereto.

 

CM Seven Star shareholders are being asked to consider and vote upon a proposal to adopt the Share Exchange Agreement, pursuant to which CM Seven Star will acquire all of the issued and outstanding shares and other equity interests of Kaixin from the Seller, and related proposals.

 

The units that were issued in CM Seven Star’s initial public offering, or the CM Seven Star Units, each consist of one ordinary share of CM Seven Star, par value $0.0001 per share, or the CM Seven Star Shares, one-half of a redeemable warrant, each whole redeemable warrant entitling the holder thereof to purchase one CM Seven Star Share, or the CM Seven Star Warrants, and one right to receive one-tenth (1/10) of an ordinary share upon the consummation of an initial business combination, or the CM Seven Star Rights. CM Seven Star shareholders (except for initial shareholders or officers or directors of CM Seven Star) will be entitled to redeem their CM Seven Star ordinary shares for a pro rata share of the trust account (currently anticipated to be no less than approximately $10.00 per share for shareholders) net of taxes payable.

 

The CM Seven Star Units, CM Seven Star Shares, CM Seven Star Warrants, and CM Seven Star Rights are currently listed on the Nasdaq Stock Market.

 

This proxy statement contains important information about the proposed Business Combination and the other matters to be acted upon at the extraordinary general meeting of CM Seven Star shareholders. You should read it carefully.

 

Q:What is being voted on?

 

A:           Below are the proposals on which CM Seven Star shareholders are being asked to vote:

 

●          To approve the Share Exchange Agreement and the transactions contemplated thereunder, including but not limited to the acquisition of all of the issued and outstanding shares and any other equity interests of Kaixin from the Seller, as provided for in the Share Exchange Agreement and the consideration paid to the Seller and the earn-out consideration by way of new issue of ordinary shares credited as fully paid in accordance with the Share Exchange Agreement, or the “Business Combination.” This proposal is referred to as the “Business Combination Proposal” or “Proposal No. 1.”

 

●          To approve increase in the number of authorized ordinary shares to [___] and removal of the class of preferred shares. This proposal is referred to as the “Authorized Share Increase Proposal” or “Proposal No. 2.”

 

●          To approve as a special resolution the change of CM Seven Star’s name to Kaixin Auto Holdings and the adoption of the Second Amended and Restated Memorandum and Articles of Association of CM Seven Star as further described herein. This proposal is referred to as the “Amendment Proposal” or “Proposal No. 3.”

 

●          To approve the issuance of more than 20% of the issued and outstanding ordinary shares of CM Seven Star pursuant to the terms of the Share Exchange Agreement, as required by Nasdaq Listing Rules 5635(a) and (d). This proposal is referred to as the “Nasdaq Proposal” or “Proposal No. 4.”

 

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●          To approve the 2018 CM Seven Star Equity Incentive Plan. This proposal is referred to as the “Equity Incentive Plan Proposal” or “Proposal No. 5.”

 

●          To approve the adjournment of the extraordinary general meeting in the event CM Seven Star does not receive the requisite shareholder vote to approve the Business Combination. This proposal is called the “Business Combination Adjournment Proposal” or “Proposal No. 6.”

 

Q:Do any of CM Seven Star’s directors or officers have interests that may conflict with my interests with respect to the Business Combination?

 

A:          CM Seven Star’s directors and officers may have interests in the Business Combination that are different from your interests as a shareholder. You should keep in mind the following interests of CM Seven Star’s directors and officers:

 

On July 11, 2017, the Company issued 4,312,500 ordinary shares to our initial shareholders for an aggregate amount of $25,000. On October 25, 2017, an additional 862,500 ordinary shares of CM Seven Star were issued to the initial shareholders for an aggregate amount of $6,038. The 5,175,000 Insider Shares include an aggregate of up to 675,000 shares that were subject to forfeiture to the extent that the underwriters’ over-allotment was not exercised in full or in part, so that the initial shareholders would own 20% of CM Seven Star’s issued and outstanding shares after the IPO. Simultaneous with the consummation of the IPO, we consummated the private placement of 475,000 private Units (“Private Placement Units”) at a price of $10.00 per Private Placement Unit, generating total proceeds of $4,750,000. The Private Placement Units were purchased by CM Seven Star’s sponsor. The underwriters exercised the over-allotment in part and on November 3, 2017, CM Seven Star consummated the private sale of an additional 52,726 private units to its sponsor, generating gross proceeds of $527,260. On November 3, 2017, the underwriters cancelled the remainder of the over-allotment option. In connection with the cancellation of the remainder of the over-allotment option, we cancelled an aggregate of 15,927 insider shares issued to our sponsor prior to the IPO.

 

If CM Seven Star does not consummate the Business Combination by the date that is 15 months from the closing of the IPO, or January 30, 2019, or by the date that is 18 months from the closing of the IPO, or April 30, 2019, if we extend the period of time to consummate a business combination, CM Seven Star will be required to dissolve and liquidate and the securities held by CM Seven Star’s insiders will be worthless because such holders have agreed to waive their rights to any liquidation distributions.

 

Approval of the Business Combination Proposal, the Nasdaq Proposal, the Equity Incentive Plan Proposal and the Business Combination Adjournment Proposal will require the affirmative vote of the holders of a majority of the issued and outstanding ordinary shares of CM Seven Star present and entitled to vote at the extraordinary general meeting; provided, however, that if [●] or more of the holders of CM Seven Star ordinary shares exercise their redemption rights then the Business Combination will not be completed. Approval of the Authorized Share Proposal and the Amendment Proposal will require the approval of at least two-thirds of the CM Seven Star ordinary shares present and entitled to vote at the extraordinary general meeting. As of the record date of the extraordinary general meeting of CM Seven Star shareholders, [●] shares held by CM Seven Star’s initial shareholders, or approximately [●]% of the outstanding CM Seven Star ordinary shares, would be voted in favor of each of the Proposals.

 

In addition, the exercise of CM Seven Star’s directors’ and officers’ discretion in agreeing to changes or waivers in the terms of the Business Combination may result in a conflict of interest when determining whether such changes or waivers are appropriate and in CM Seven Star shareholders’ best interests.

 

Q:When and where is the extraordinary general meeting of CM Seven Star’s shareholders?

 

A:           The extraordinary general meeting of CM Seven Star shareholders will take place at [●] on [●], 2019, at [●] a.m.

 

Q:Who may vote at the extraordinary general meeting of shareholders?

 

A:           Only holders of record of CM Seven Star ordinary shares as of the close of business on [●], 2019 may vote at the extraordinary general meeting of shareholders. As of [●], 2019, there were [●] CM Seven Star ordinary shares outstanding and entitled to vote. Please see “Extraordinary General Meeting of CM Seven Star Shareholders — Record Date; Who is Entitled to Vote” for further information.

 

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Q:What is the quorum requirement for the extraordinary general meeting of shareholders?

 

A:           Shareholders representing a majority of the ordinary shares issued and outstanding as of the record date and entitled to vote at the extraordinary general meeting must be present in person or represented by proxy in order to hold the extraordinary general meeting and conduct business. This is called a quorum. CM Seven Star ordinary shares will be counted for purposes of determining if there is a quorum if the shareholder (i) is present and entitled to vote at the meeting, or (ii) has properly submitted a proxy card. In the absence of a quorum, the extraordinary general meeting shall stand adjourned to the same day in the next week at the same time and/or place or to such other day, time or place as the directors may determine.

 

Q:What vote is required to approve the Proposals?

 

A:           Approval of the Business Combination Proposal, the Nasdaq Proposal, the Equity Incentive Plan Proposal and the Business Combination Adjournment Proposal will require the affirmative vote of the holders of a majority of the issued and outstanding ordinary shares of CM Seven Star present and entitled to vote at the extraordinary general meeting; provided, however, that if [●] or more of the holders of CM Seven Star ordinary shares exercise their redemption rights then the Business Combination will not be completed. Approval of the Auhorized Share Increase Proposal and the Amendment Proposal will require the approval of at least two-thirds of the CM Seven Star ordinary shares present and entitled to vote at the extraordinary general meeting. Attending the extraordinary general meeting either in person or by proxy and abstaining from voting will have the same effect as voting against all the Proposals and, assuming a quorum is present, broker non-votes will have no effect on the Proposals.

 

Q:Are the proposals conditioned on one another?

 

A: Yes. The Business Combination Proposal and the Nasdaq Proposal are conditioned upon the approval of the Amendment Proposal. The Amendment Proposal is conditioned upon the approval of the Business Combination Proposal and the Nasdaq Proposal. The Equity Incentive Plan Proposal is conditioned upon the approval of the other proposals.

  

Q:How will the initial shareholders vote?

 

A:           CM Seven Star’s initial shareholders, who as of [●], 2019 owned [●] CM Seven Star ordinary shares, or approximately [●]% of the outstanding CM Seven Star ordinary shares, have agreed to vote their respective ordinary shares acquired by them prior to the initial public offering in favor of the Business Combination Proposal and related proposals. CM Seven Star’s initial shareholders have also agreed that they will vote any shares they purchase in the open market in or after the IPO in favor of each of the Proposals.

 

Q:Am I required to vote against the Business Combination Proposal in order to have my ordinary shares redeemed?

 

A:           No. You are not required to vote against the Business Combination Proposal in order to have the right to demand that CM Seven Star redeem your ordinary shares for cash equal to your pro rata share of the aggregate amount then on deposit in the trust account (before payment of deferred underwriting commissions and including interest earned on their pro rata portion of the trust account, net of taxes payable). These rights to demand redemption of CM Seven Star ordinary shares for cash are sometimes referred to herein as redemption rights. If the Business Combination is not completed, then holders of CM Seven Star ordinary shares electing to exercise their redemption rights will not be entitled to receive such payments.

 

Q:How do I exercise my redemption rights?

 

A:           In order to exercise your redemption rights, you must vote for or against the Business Combination and mark the appropriate space on the applicable enclosed proxy card and providing physical or electronic delivery of your ordinary share certificates, as appropriate, prior to the extraordinary general meeting of CM Seven Star shareholders.

 

Any request for redemption, once made, may be withdrawn at any time up to the date of the extraordinary meeting of CM Seven Star shareholders. The actual per share redemption price will be equal to the aggregate amount then on deposit in the trust account (before payment of deferred underwriting commissions and including interest earned on their pro rata portion of the trust account, net of taxes payable), divided by the number of ordinary shares sold in the IPO. Please see the section entitled “Extraordinary General Meeting of CM Seven Star Shareholders — Redemption Rights” for the procedures to be followed if you wish to redeem your CM Seven Star ordinary shares for cash.

 

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Q:How can I vote?

 

A:           If you were a holder of record CM Seven Star ordinary shares on [●], 2019, the record date for the extraordinary general meeting of CM Seven Star shareholders, you may vote with respect to the applicable proposals in person at the extraordinary general meeting of CM Seven Star shareholders, or by submitting a proxy by mail so that it is received prior to 9:00 a.m. on [●], 2019, in accordance with the instructions provided to you under “Extraordinary Meeting of CM Seven Star Shareholders.” If you hold your shares in “street name,” which means your shares are held of record by a broker, bank or other nominee, your broker or bank or other nominee may provide voting instructions (including any telephone or Internet voting instructions). You should contact your broker, bank or nominee in advance to ensure that votes related to the shares you beneficially own will be properly counted. In this regard, you must provide the record holder of your shares with instructions on how to vote your shares or, if you wish to attend the extraordinary general meeting of CM Seven Star shareholders and vote in person, obtain a proxy from your broker, bank or nominee.

 

Q:If my shares are held in “street name” by my bank, brokerage firm or nominee, will they automatically vote my shares for me?

 

A:           No. Under the rules of various national and regional securities exchanges, your broker, bank or nominee cannot vote your shares with respect to non-discretionary matters unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or nominee. CM Seven Star believes the Proposals are non-discretionary and, therefore, your broker, bank or nominee cannot vote your shares without your instruction. Broker non-votes will not be considered present for the purposes of establishing a quorum and will have no effect on the Proposals. If you do not provide instructions with your proxy, your bank, broker or other nominee may submit a proxy card expressly indicating that it is NOT voting your shares; this indication that a bank, broker or nominee is not voting your shares is referred to as a “broker non-vote.” Your bank, broker or other nominee can vote your shares only if you provide instructions on how to vote. You should instruct your broker to vote your CM Seven Star shares in accordance with directions you provide.

 

Q:What if I abstain from voting or fail to instruct my bank, brokerage firm or nominee?

 

A:           CM Seven Star will count a properly executed proxy marked “ABSTAIN” with respect to a particular Proposal as present for the purposes of determining whether a quorum is present at the extraordinary general meeting of CM Seven Star shareholders. For purposes of approval, an abstention on any Proposals will have the same effect as a vote “AGAINST” such Proposal. Additionally, failure to elect to exercise your redemption rights will preclude you from having your ordinary shares redeemed for cash. In order to exercise your redemption rights, you must make an election on the applicable proxy card to redeem such CM Seven Star ordinary shares or submit a request in writing to CM Seven Star’s transfer agent at the address listed on page [●], and deliver your shares to CM Seven Star’s transfer agent physically or electronically through DTC prior to the extraordinary general meeting of CM Seven Star shareholders.

 

Q:Can I change my vote after I have mailed my proxy card?

 

A:           Yes. You may change your vote at any time before your proxy is voted at the extraordinary general meeting. You may revoke your proxy by executing and returning a proxy card dated later than the previous one, or by attending the extraordinary general meeting in person and casting your vote by ballot or by submitting a written revocation stating that you would like to revoke your proxy that we receive prior to the extraordinary general meeting. If you hold your shares through a bank, brokerage firm or nominee, you should follow the instructions of your bank, brokerage firm or nominee regarding the revocation of proxies. If you are a record holder, you should send any notice of revocation or your completed new proxy card, as the case may be, to:

 

Suite 1306, 13/F, AIA Central, Connaught Road 

Central, Hong Kong 

Attn: Sing Wang
Telephone: +852 3796 2750

 

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Q:Should I send in my share certificates now?

 

A:           Yes. CM Seven Star shareholders who intend to have their ordinary shares redeemed, by electing to have those ordinary shares redeemed for cash on the proxy card, should send their certificates by the day prior to the extraordinary general meeting. Please see “Extraordinary General Meeting of CM Seven Star Shareholders — Redemption Rights” for the procedures to be followed if you wish to redeem your ordinary shares for cash.

 

Q:When is the Business Combination expected to occur?

 

A:           Assuming the requisite shareholder approvals are received, CM Seven Star expects that the Business Combination will occur no later than [●], 2019.

 

Q:May I seek statutory appraisal rights or dissenter rights with respect to my shares?

 

A:           No. Appraisal rights are not available to holders of CM Seven Star ordinary shares in connection with the proposed Business Combination. For additional information, see the sections entitled “Extraordinary General Meeting of CM Seven Star Shareholders—Appraisal Rights.”

 

Q:What happens if the Business Combination is not consummated?

 

A:           If CM Seven Star does not consummate the Business Combination by the date that is 15 months from the closing of the IPO, or January 30, 2019, or by the date that is 18 months from the closing of the IPO, or April 30, 2019, if we extend the period of time to consummate a business combination, then pursuant to Article 48.4 of our Amended and Restated Memorandum and Articles of Association, CM Seven Star’s officers must take all actions necessary in accordance with the Cayman Islands Companies Law (Revised) (referred to herein as the “Companies Law”) to dissolve and liquidate CM Seven Star as soon as reasonably practicable. Following dissolution, CM Seven Star will no longer exist as a company. In any liquidation, the funds held in the Trust Account, plus any interest earned thereon (net of taxes payable), together with any remaining out-of-trust net assets will be distributed pro-rata to holders of CM Seven Star ordinary shares who acquired such ordinary shares in CM Seven Star’s IPO or in the aftermarket. If the Business Combination is not effected by the date that is 15 months from the closing of the IPO, or January 30, 2019, or by the date that is 18 months from the closing of the IPO, or April 30, 2019, if we extend the period of time to consummate a business combination, the CM Seven Star Rights will expire worthless. The estimated consideration that each CM Seven Star share would be paid at liquidation would be approximately $[●] per share for shareholders based on amounts on deposit in the Trust Account as of [●], 2018. The closing price of CM Seven Star’s ordinary shares on the Nasdaq Stock Market as of [●], 2019 was $[●]. CM Seven Star’s initial shareholders waived the right to any liquidation distribution with respect to any CM Seven Star ordinary shares held by them.

 

Q:What happens to the funds deposited in the Trust Account following the Business Combination?

 

A:           Following the closing of the Business Combination, funds in the Trust Account will be released to CM Seven Star. Holders of CM Seven Star ordinary shares exercising redemption rights will receive their per share redemption price. The balance of the funds will be utilized to fund the Business Combination. As of [●], 2018, there was approximately $[●] in CM Seven Star’s Trust Account. Approximately $[●] per outstanding share issued in CM Seven Star’s initial public offering will be paid to the public investors. Any funds remaining in the Trust Account after such uses will be used for future working capital and other corporate purposes of the combined entity.

 

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DELIVERY OF DOCUMENTS TO CM SEVen Star’s shareholders

 

Pursuant to the rules of the SEC, CM Seven Star and services that it employs to deliver communications to its shareholders are permitted to deliver to two or more shareholders sharing the same address a single copy of the proxy statement, unless CM Seven Star has received contrary instructions from one or more of such shareholders. Upon written or oral request, CM Seven Star will deliver a separate copy of the proxy statement to any shareholder at a shared address to which a single copy of the proxy statement was delivered and who wishes to receive separate copies in the future. Shareholders receiving multiple copies of the proxy statement may likewise request that CM Seven Star deliver single copies of the proxy statement in the future. Shareholders may notify CM Seven Star of their requests by contacting CM Seven Star as follows:

 

Suite 1306, 13/F, AIA Central, Connaught Road 

Central, Hong Kong 

Attn: Sing Wang
Telephone: +852 3796 2750

 

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SUMMARY OF THE PROXY STATEMENT

 

This summary highlights selected information from this proxy statement but may not contain all of the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, including the Share Exchange Agreement attached as Annex A. Please read these documents carefully as they are the legal documents that govern the Business Combination and your rights in the Business Combination.

 

The Parties

 

CM Seven Star

 

CM Seven Star Acquisition Corporation

Suite 1306, 13/F, AIA Central, Connaught Road

Central, Hong Kong

Attn: Sing Wang
Telephone: +852 3796 2750

 

CM Seven Star Acquisition Corporation, or CM Seven Star, was incorporated as a blank check company on November 28, 2016, under the laws of the Cayman Islands, for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or similar business combination with one or more businesses or entities, which we refer to as a “target business.” CM Seven Star’s efforts to identify a prospective target business were not be limited to any particular industry or geographic location.

 

CM Seven Star completed its initial public offering (“IPO”) on October 30, 2017 of 18,000,000 units, with each unit consisting of one ordinary share (“Ordinary Share”), par value $.0001 per share, one-half of a redeemable warrant (“Warrant”) and one right (“Right”) to receive one-tenth of an ordinary share upon consummation of an initial business combination. Simultaneous with the consummation of the IPO, we consummated the private placement of 475,000 private Units (“Private Placement Units”) at a price of $10.00 per Private Placement Unit, generating total proceeds of $4,750,000. The Private Placement Units were purchased by CM Seven Star’s sponsor. The underwriters in the IPO exercised the over-allotment option in part and on November 3, 2017, the underwriters purchased 2,636,293 over-allotment option Units, which were sold at an offering price of $10.00 per Unit, generating gross proceeds of $26,362,930. Simultaneously with the sale of the over-allotment Units, CM Seven Star consummated the private sale of an additional 52,726 Private Units to its sponsor, generating gross proceeds of $527,260. On November 3, 2017, the underwriters canceled the remainder of the over-allotment option. In connection with the cancellation of the remainder of the over-allotment option, CM Seven Star canceled an aggregate of 15,927 Ordinary Shares issued to our sponsor prior to the IPO and private placement.

 

After deducting the underwriting discounts and commissions and the offering expenses, a total of $206,362,930 was deposited into a trust account established for the benefit of CM Seven Star’s public shareholders, and the remaining proceeds became available to be used to provide for business, legal and accounting due diligence on prospective business combinations and continuing general and administrative expenses. [As of December 31, 2018], we have approximately $[●] of unused net proceeds that were not deposited into the trust fund to pay future general and administrative expenses. The net proceeds deposited into the trust fund remain on deposit in the trust fund earning interest. As of [December 31, 2018], there was $[●] held in the trust fund (including $[●] of accrued interest which we can withdraw to pay taxes).

 

CM Seven Star’s units, shares, warrants and rights are each quoted on the Nasdaq Stock Market, under the symbols “CMSSU,” “CMSS,” “CMSSW” and “CMSSR,” respectively. Each of CM Seven Star’s units consist of ordinary share, one-half of one redeemable warrant, and one right to receive one-tenth (1/10) of an ordinary share upon the consummation of an initial business combination. CM Seven Star’s units commenced trading on October 26, 2017. CM Seven Star’s shares, warrants and rights commenced trading on November 6, 2017.

 

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Kaixin Auto Group

 

5/F, North Wing, 18 Jiuxianqiao Middle Road

Chaoyang District, Beijing 100016, People’s Republic of China

Attn: Thomas Jinato Ren

Telephone: +86 (10) 8448-1818

 

Kaixin is the largest premium used auto dealership group in China in terms of the number of cities and locations of its Dealerships, and the second largest based on revenues in 2017, according to iResearch. Pursuant to the Business Combination, Kaixin has transferred its Ji’nan Dealership to Renren, such that at the completion of the Business Combination, Kaixin is expected to have 14 Dealerships, subject to any additional Dealership acquisitions by Kaixin. As of June 30, 2018, Kaixin had 15 Dealerships covering 15 cities in 13 provinces in China. On average, Kaixin’s Dealership operators have over ten years of experience in the used car industry. Kaixin provides used car buyers in China with access to a wide selection of used vehicles across its network of Dealerships, with a focus on premium brands, such as Audi, BMW, Mercedes-Benz, Land Rover and Porsche. In addition to auto sales, for the convenience of its customers, Kaixin also provides financing channels to customers and other in-network dealers through its partnerships with several financial institutions, including Ping An Bank, Shanghai Branch. Furthermore, beginning in the third quarter of 2017, Kaixin started to offer value-added services to its customers, including insurance, extended warranties and after-sales services.

 

Kaixin’s strong market position is enabled in part by its technology strength. Kaixin was founded by Renren, a pioneer in China’s internet industry, providing services including social media, online gaming and internet financing, has have transitioned from a provider of financing solutions to automotive dealers to a seller of used cars. Kaixin has leveraged Renren’s expertise and experience to integrate technology in support of its operating platforms, including a mobile app for consumers to browse for cars and purchase related value-added services, big data analytics used to optimize procurement and operational management and an auto dealership SaaS platform used to empower its Dealerships’ operations and management capabilities.

 

The Business Combination and Share Exchange Agreement

 

Business Combination with Kaixin; Business Combination Consideration

 

Upon the closing of the transactions contemplated in the Share Exchange Agreement, CM Seven Star will acquire 100% of the issued and outstanding securities of Kaixin, in exchange for approximately 28.3 million ordinary shares of CM Seven Star, or one CM Seven Star share for approximately 4.85 outstanding shares of Kaixin. An additional 4.7 million shares million shares of CM Seven Star will be issued at closing in exchange for currently outstanding options in Kaixin or reserved for issuance under an equity incentive plan. Additionally, 19.5 million earnout shares are to be issued and held in escrow. The Seller may be entitled to receive earnout shares as follows: (1) if the Company’s gross revenue for the year ended December 31, 2019 is greater than or equal to RMB 5,000,000,000, the Seller is entitled to receive 1,950,000 ordinary shares of CM Seven Star; (2) if the Company’s adjusted EBITDA for the year ended December 31, 2019 is greater than or equal to RMB 150,000,000, the Seller is entitled to receive 3,900,000 ordinary shares of CM Seven Star, increasing proportionally to 7,800,000 ordinary shares if Company’s adjusted EBITDA is greater than or equal to RMB 200,000,000; and (3) if the Company’s adjusted EBITDA for the year ended December 31, 2020 is greater than or equal to RMB 340,000,000, the Seller is entitled to receive 4,875,000 ordinary shares of CM Seven Star, increasing proportionally to 9,750,000 ordinary shares if the Company’s adjusted EBITDA is greater than or equal to RMB 480,000,000. By way of example, if the combined company’s adjusted EBITDA is equal to RMB175,000,000 for the year ended December 31, 2019, the Seller would receive 5,850,000 ordinary shares ((a) (i) 175,000,000 – 150,000,000, divided by (ii) 200,000,000 – 150,000,000 multiplied by (b) 7,800,000 – 3,900,000, plus (c) 3,900,000). The definition of adjusted EBITDA is set forth on page 15 of this proxy statement.

 

Notwithstanding the Revenue and Adjusted EBITDA achieved by the post-transaction company for any period, Renren will receive the 2019 earnout shares if the stock price of CM Seven Star is higher than $13.00 for any sixty days in any period of ninety consecutive trading days during an fifteen month period following the closing, and will receive the 2019 earnout shares and the 2020 earnout shares if the stock price of CM Seven Star is higher than $13.50 for any sixty days in any period of ninety consecutive trading days during a thirty month period following the closing.

 

After the Business Combination, assuming no redemptions of ordinary shares for cash, CM Seven Star’s current public shareholders will own approximately [●]% of CM Seven Star, CM Seven Star’s current directors, officers and affiliates will own approximately [●]% of CM Seven Star, and the Seller will own approximately [●]% of CM Seven Star. Assuming redemption by holders of [●] of CM Seven Star’s ordinary shares, CM Seven Star public shareholders will own approximately [●]% of CM Seven Star, CM Seven Star’s current directors, officers and affiliates will own approximately [●]% of CM Seven Star, and the Seller will own approximately [●]% of CM Seven Star. Upon consummation of the Business Combination, Kaixin will be a wholly-owned subsidiary of CM Seven Star.

 

The Business Combination and the Share Exchange Agreement comply with the terms described in CM Seven Star’s Registration Statement on Form S-1 relating to its initial public offering. Furthermore, the consummation of the Business Combination is conditioned upon the majority of the ordinary shares voted by CM Seven Star’s shareholders voting in favor of the Business Combination and holders of less than [●] ordinary shares exercising their redemption rights, according to the financial statements as of September 30, 2018.

 

Management

 

Effective as of the closing date, the board of directors of CM Seven Star will consist of five members. The members designated by Shareholder Value Fund, CM Seven Star’s designee, will include [●], and the members designated by the Seller will include Joseph Chen, James Jian Liu, Tianruo Pu and Lin Cong. Chen Ji will be the Chief Executive Officer of CM Seven Star after the consummation of the Business Combination. See “Directors and Executive Officers after the Business Combination” elsewhere in this proxy statement for additional information.

 

 

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The Share Exchange Agreement

 

On November 2, 2018, CM Seven Star, the Seller, and Kaixin Auto Group entered into the Share Exchange Agreement, pursuant to which CM Seven Star will purchase from the Seller all of the issued and outstanding shares and other equity interests in and of Kaixin. See “The Share Exchange Agreement — Business Combination with Kaixin; Business Combination Consideration” for more detailed information.

 

Upon the closing of the transactions contemplated in the Share Exchange Agreement, CM Seven Star will acquire 100% of the issued and outstanding securities of Kaixin, in exchange for approximately 28.3 million ordinary shares of CM Seven Star, or one CM Seven Star share for approximately 4.85 outstanding shares of Kaixin. An additional 4.7 million shares million shares of CM Seven Star will be issued at closing in exchange for currently outstanding options in Kaixin or reserved for issuance under an equity incentive plan. Additionally, 19.5 million earnout shares are to be issued and held in escrow. The Seller may be entitled to receive earnout shares as follows: (1) if the Company’s gross revenue for the year ended December 31, 2019 is greater than or equal to RMB 5,000,000,000, the Seller is entitled to receive 1,950,000 ordinary shares of CM Seven Star; (2) if the Company’s adjusted EBITDA for the year ended December 31, 2019 is greater than or equal to RMB 150,000,000, the Seller is entitled to receive 3,900,000 ordinary shares of CM Seven Star, increasing proportionally to 7,800,000 ordinary shares if Company’s adjusted EBITDA is greater than or equal to RMB 200,000,000; and (3) if the Company’s adjusted EBITDA for the year ended December 31, 2020 is greater than or equal to RMB 340,000,000, the Seller is entitled to receive 4,875,000 ordinary shares of CM Seven Star, increasing proportionally to 9,750,000 ordinary shares if the Company’s adjusted EBITDA is greater than or equal to RMB 480,000,000. The definition of adjusted EBITDA is set forth on page 15 of this proxy statement.

 

Notwithstanding the Revenue and Adjusted EBITDA achieved by the post-transaction company for any period, Renren will receive the 2019 earnout shares if the stock price of CM Seven Star is higher than $13.00 for any sixty days in any period of ninety consecutive trading days during an fifteen month period following the closing, and will receive the 2019 earnout shares and the 2020 earnout shares if the stock price of CM Seven Star is higher than $13.50 for any sixty days in any period of ninety consecutive trading days during a thirty month period following the closing.

 

The obligations of the Seller and Kaixin to consummate the transactions contemplated by the Share Exchange Agreement, in addition to the conditions described above, are conditioned upon each of the following, among other things:

 

CM Seven Star complying with all of its obligations under the Share Exchange Agreement;

 

the representations and warranties of CM Seven Star being true on and as of the closing date of the Acquisition;

 

Kaixin receiving a legal opinion from CM Seven Star’s counsel in the Cayman Islands; and

 

there having been no material adverse effect to Kaixin’s business;

 

CM Seven Star’s Conditions to Closing

 

The obligations of CM Seven Star to consummate the transactions contemplated by the Share Exchange Agreement, in addition to the conditions described above in the first paragraph of this section, are conditioned upon each of the following, among other things:

 

Kaixin complying with all of its obligations under the Share Exchange Agreement;

 

the representations and warranties of Kaixin being true on and as of the closing date of the acquisition and Kaixin complying with all required covenants in the Share Exchange Agreement;

 

there having been no material adverse effect to Cm Seven Star’s business;

 

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CM Seven Star receiving a legal opinion from Kaixin’s counsel in the PRC and Cayman Islands;

 

the forfeiture by the Seller of all loans listed on the relevant disclosure schedule made to Kaixin or its subsidiaries; and

 

Kaixin selling one of its subsidiaries to an affiliate of the Seller.

 

See “The Share Exchange Agreement — Conditions to Closing” for more details.

 

Other Agreements Relating to the Business Combination

 

Escrow Agreement

 

In connection with the Acquisition, CM Seven Star, the Seller and an escrow agent, will enter into an Escrow Agreement, pursuant to which CM Seven Star shall deposit 22.8 million of its ordinary shares as earnout shares and to secure the indemnification obligations of the Seller as contemplated by the Share Exchange Agreement.

 

Investor Rights Agreement

 

In connection with the Acquisition, CM Seven Star and the Seller will enter into an Investor Rights Agreement with respect to certain lock-up arrangements in respect of the Seller, registration rights granted by CM Seven Star in favor of the Seller, certain voting arrangements relating to CM Seven Star and the issuance of options to certain holders of options under Kaixin’s 2018 Equity Incentive Plan pursuant to such Investor Rights Agreement.

 

Transitional Agreements

 

In connection with the Acquisition, CM Seven Star and the Seller will enter into a Master Transitional Agreement, Transitional Non-Competition Agreement and Transitional Services Agreement (the “Transitional Agreements”), pursuant to which the Seller will agree to provide certain transitional services in connection with the Acquisition.

 

Recommendations of the Boards of Directors and Reasons for the Business Combination

 

After careful consideration of the terms and conditions of the Share Exchange Agreement, the board of directors of CM Seven Star has determined that Business Combination and the transactions contemplated thereby are fair to and in the best interests of CM Seven Star and its shareholders. In reaching its decision with respect to the Business Combination and the transactions contemplated thereby, the board of directors of CM Seven Star reviewed various industry and financial data and the due diligence and evaluation materials provided by Kaixin. The board of directors did not obtain a fairness opinion on which to base its assessment. CM Seven Star’s board of directors recommends that CM Seven Star shareholders vote:

 

FOR the Business Combination Proposal;

FOR the Authorized Share Increase Proposal;

FOR the Amendment Proposal;

FOR the Nasdaq Proposal;

FOR the Equity Incentive Plan Proposal; and

FOR the Business Combination Adjournment Proposal.

 

Interests of Certain Persons in the Business Combination

 

When you consider the recommendation of CM Seven Star’s board of directors in favor of adoption of the Business Combination Proposal and other Proposals, you should keep in mind that CM Seven Star’s directors and officers have interests in the Business Combination that are different from, or in addition to, your interests as a shareholder, including:

 

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If the proposed Business Combination is not completed by the date that is 15 months from the closing of the IPO, or January 30, 2019, or by the date that is 18 months from the closing of the IPO, or April 30, 2019, if we extend the period of time to consummate a business combination, CM Seven Star will be required to liquidate. In such event, the 4,312,500 ordinary shares held by CM Seven Star’s initial shareholders, which were acquired prior to the IPO for an aggregate purchase price of $25,000, the additional 862,500 shares issued to the initial shareholders concurrently with the consummation of the IPO for an aggregate purchase price of $6,038, and the ordinary shares included as part of the 475,000 private units issued to our sponsor simultaneously with the consummation of the IPO, as well as the 52,726 private units issued to our sponsor in connection with the sale of the over-allotment units, will be worthless. Such ordinary shares had an aggregate market value of approximately $[●] based on the closing price of CM Seven Star’s ordinary shares of $[●] on the Nasdaq Stock Market as of [●], 2019.

 

Unless CM Seven Star consummates the Business Combination, its officers, directors and initial shareholders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceeded the amount of its working capital. As a result, the financial interest of CM Seven Star’s officers, directors and initial shareholders or their affiliates could influence its officers’ and directors’ motivation in selecting Kaixin as a target and therefore there may be a conflict of interest when it determined that the Business Combination is in the shareholders’ best interest.

 

In addition, the exercise of CM Seven Star’s directors’ and officers’ discretion in agreeing to changes or waivers in the terms of the transaction may result in a conflict of interest when determining whether such changes or waivers are appropriate and in our shareholders’ best interest.

 

Certain Developments

 

On January 28, 2019, Kaixin, CM Seven Star and an investor entered into a convertible loan agreement pursuant to which the investor has agreed to invest US$23 million into Kaixin with interest payable at the loan interest rate as stipulated by the People’s Bank of China. An additional penalty interest rate will apply for unremitted amounts in the event of a default. US$20 million of the loan was advanced to Kaixin on January 28, 2019, and the remaining US$3 million is to be advanced to Kaixin on January 31, 2020. Upon completion of the business combination, amounts outstanding under the convertible loan will be converted into units of CM Seven Star at a conversion price of US$10.00 per unit, and subsequent amounts payable under the loan will immediately convert into units of CM Seven Star at a conversion price of US$10.00 per unit.

 

Voting Securities

 

As of [●], 2019, there were [●] ordinary shares of CM Seven Star issued and outstanding. Only CM Seven Star shareholders who hold ordinary shares of record as of the close of business on [●], 2019 are entitled to vote at the extraordinary general meeting of shareholders or any adjournment of the extraordinary general meeting. Approval of the Business Combination Proposal, the Nasdaq Proposal, the Equity Incentive Plan Proposal and the Business Combination Adjournment Proposal will require the affirmative vote of the holders of a majority of the issued and outstanding ordinary shares of CM Seven Star present and entitled to vote at the extraordinary general meeting; provided, however, that if [●] or more of the holders of CM Seven Star ordinary shares exercise their redemption rights then the Business Combination will not be completed. Approval of the Authorized Share Increase Proposal and the Amendment Proposal will require the approval of at least two-thirds of the CM Seven Star ordinary shares present and entitled to vote at the extraordinary general meeting. Attending the extraordinary general meeting either in person or by proxy and abstaining from voting will have the same effect as voting against all the proposals and, assuming a quorum is present, broker non-votes will have no effect on the Proposals.

 

As of [●], 2019, CM Seven Star’s initial shareholders, either directly or beneficially, owned and were entitled to vote [●] ordinary shares, or approximately [●]% of CM Seven Star’s outstanding ordinary shares. With respect to the Business Combination, CM Seven Star’s initial shareholders have agreed to vote their respective CM Seven Star ordinary shares acquired by them in favor of the Business Combination Proposal and related Proposals. They have indicated that they intend to vote their shares, as applicable, “FOR” each of the other Proposals although there is no agreement in place with respect to these Proposals.

 

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Appraisal Rights

 

Holders of CM Seven Star ordinary shares are not entitled to appraisal rights under the Cayman Islands Law.

 

Emerging Growth Company

 

CM Seven Star is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (or JOBS Act). It is anticipated that after the consummation of the transactions, CM Seven Star will continue to be an “emerging growth company.” As an emerging growth company, CM Seven Star will be eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These include, but are not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and the requirement to obtain shareholder approval of any golden parachute payments not previously approved.

 

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. CM Seven Star has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, CM Seven Star, as an emerging growth company, will not adopt the new or revised standard until the time private companies are required to adopt the new or revised standard. This may make comparison of CM Seven Star’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accountant standards used.

 

CM Seven Star could remain an emerging growth company until the last day of its fiscal year following December 31, 2022 (the fifth anniversary of the consummation of its initial public offering). However, if CM Seven Star’s non-convertible debt issued within a three-year period or its total revenues exceed $1.07 billion or the market value of its shares of ordinary shares that are held by non-affiliates exceeds $700 million on the last day of the second fiscal quarter of any given fiscal year, CM Seven Star would cease to be an emerging growth company as of the following fiscal year.

 

However, the post-transaction entity will not be able to take advantage of the extended transition period for complying with new or revised accounting standards since Kaixin has elected not to take advantage of the extended transition period.

 

Anticipated Accounting Treatment

 

The Business Combination will be accounted for as a “reverse merger” in accordance with U.S. GAAP. Under this method of accounting CM Seven Star will be treated as the “acquired” company for financial reporting purposes. This determination is primarily based on the fact that subseqeuent to the Business Combination, Kaixin Securityholders are expected to have a majority of the voting power of the combined company, Kaixin comprising all of the ongoing operations of the combined entity, Kaixin comprising a majority of the governing body of the combined company, and Kaixin’s senior management comprising all of the senior management of the combined company. Accordingly, for accounting purposes, the Business Combination will be treated as the equivalent of Kaixin issuing stock for the net assets of CM Seven Star, accompanied by a recapitalization. The net assets of CM Seven Star will be stated at fair value which approximates historical costs as CM Seven Star has only cash and short-term liabilities. No goodwill or other intangible assets will be recorded. Operations prior to the business combination will be those of Kaixin.

 

Regulatory Approvals

 

The Business Combination and the other transactions contemplated by the Share Exchange Agreement are not subject to any additional federal or state regulatory requirements or approvals, including the Hart-Scott Rodino Antitrust Improvements Act of 1976, except for filings with the Registrar of the Cayman Islands necessary to effectuate the transactions contemplated by the Share Exchange Agreement.

 

 12 

 

 

KAIXIN AUTO GROUP SUMMARY FINANCIAL INFORMATION

 

The data below as for the years ended December 31, 2015, 2016 and 2017 has been derived from Kaixin’s audited consolidated financial statements for such years, which are included in this proxy statement. The data for the six-month periods ended June 30, 2017 and 2018 has been derived from Kaixin’s unaudited condensed consolidated financial statements for such periods, which are included in this proxy statement. Kaixin’s consolidated financial statements are prepared and presented in accordance with U.S. GAAP.

 

Kaixin’s historical results are not necessarily indicative of results to be expected for any future period. The information is only a summary and should be read in conjunction with Kaixin’s consolidated financial statements and related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Kaixin Auto Group” contained elsewhere herein. The historical results included below and elsewhere in this proxy statement are not indicative of the future performance of Kaixin or CM Seven Star.

 

Summary Consolidated Statements of Operations Data

 

  

Years ended December 31,

  

6 months ended June 30,

 
  

2015

  

2016

  

2017

  

2017

  

2018(1)

 
   US$   US$   US$   US$   US$ 
   (in thousands, except share and per share data) 
Net revenues:                         
Automobile sales  $        121,084   $1,042   $246,334 
Financing income   4,798    20,778    26,426    15,773    2,317 
Others       68    2,340    24    4,655 
Total net revenues   4,798    20,846    149,850    16,839    253,306 
Cost of revenues:                         
Automobile sales           116,385    992    234,226 
Cost of financing income   1,159    10,874    15,259    8,073    3,130 
Provision for financing receivable   437    3,165    12,717    2,605    4,872 
Others   3    32    32    24    193 
Total cost of revenues   1,599    14,071    144,393    11,694    242,421 
Gross profit   3,199    6,775    5,457    5,145    10,885 
Operating expenses:                         
General and administrative   1,796    10,367    15,225    6,167    17,326 
Selling and marketing   1,397    7,999    10,874    4,526    13,625 
Research and development   443    2,374    3,982    1,793    2,405 
Total operating expenses   3,636    20,740    30,081    12,486    33,356 
Loss from operations   (437)   (13,965)   (24,624)   (7,341)   (22,471)
Other expenses       (339)   (2,214)   14    (5,863)
Interest income   77    64    902    215    495 
Interest expenses       (58)   (3,068)   (932)   (1,894)
Loss before provision of income tax and noncontrolling interest, net of tax   (360)   (14,298)   (29,004)   (8,044)   (29,733)
Income tax expenses   (1,859)   (1,690)   (1,158)   (1,336)   (1,110)
Loss from continuing operations  $(2,219)   (15,988)   (30,162)  $(9,380)  $(30,843)
Discontinued operations:                         
(Loss) income from discontinued operations, net of taxes of nil and nil for the years ended December 31, 2015, 2016 and 2017 and the six months ended June 30, 2017 and 2018   (5,152)   (8,066)   1,467    923     
Net loss   (7,371)   (24,054)   (28,695)   (8,457)   (30,843)
Net loss attributable to the noncontrolling interest           (76)       (120)
Net loss from continuing operations attributable to Kaixin Auto Group   (2,219)   (15,988)   (30,086)   (9,380)   (30,723)
Net (loss) income from discontinued operations attributable to Kaixin Auto Group   (5,152)   (8,066)   1,467    923     
Net loss attributable to Kaixin Auto Group  $(7,371)  $(24,054)  $(28,619)  $(8,457)  $(30,723)

 

(1)Pursuant to the Business Combination, Kaixin has transferred its Ji’nan Dealership to Renren, such that at the completion of the Business Combination, Kaixin is expected to have 14 Dealerships, subject to any additional Dealership acquisitions by Kaixin. This asset transfer may affect the future results of Kaixin. For reference, for the six months ended June 30, 2018, the Ji’nan Dealership’s total net revenues were US$47.2 million, comprised of financing income of nil, automoibile sales revenue of US$46.8 million and other revenues of US$0.4 million; total cost of revenues were US$44.3 million; and gross profit of US$2.9 million.

 

                          

 

 13 

 

 

Summary Consolidated Balance Sheet Data

 

  

Years ended December 31,

  

6 months ended June 30,

 
  

2016

  

2017

  

2018

 
   US$   US$   US$ 
   (in thousands)     
Cash and cash equivalents   34,697    17,194    12,150 
Restricted cash   288    47,253    6,347 
Financing receivable   292,006    125,353    13,224 
Inventory       95,012    73,890 
Total current assets   349,343    318,303    163,078 
Long-term financing receivable   54    8     
Goodwill       91,644    109,507 
Total non-current assets   163    91,792    110,491 
Total assets   349,506    410,095    273,569 
Total current liabilities   311,237    320,149    196,266 
Total non-current liabilities   59,916    88,515    79,181 
Total Liabilities   371,153    408,664    275,447 
Total Kaixin Auto Group shareholders’ equity (deficit)   (21,647)   (33,222)   (46,030)
Total equity (deficit)   (21,647)   1,431    (1,878)
Total liabilities and equity (deficit)   349,506    410,095    273,569 

 

 14 

 

 

 Non-GAAP Measure

 

In evaluating its business, Kaixin considers and uses the following non-GAAP measure as supplemental measures to review and assess its operating performance:

 

    Years ended December 31,     6 months ended June 30,  
    2015     2016     2017     2017     2018  
    US$     US$     US$     US$     US$  
    (in thousands)  
Other Consolidated Financial Data:                                        
Adjusted EBITDA(1)     (5,104 )     (18,612 )     (18,226 )     (4,134 )     (10,405 )

 

 

(1)Adjusted EBITDA represents net loss plus contingent consideration fair value change, share-based compensation expense, interest (income) expenses, income tax expenses, and depreciation.

 

Kaixin uses Adjusted EBITDA, which is a non-GAAP financial measure in the evaluation of its operating results and in its financial and operational decision-making. Adjusted EBITDA represents net loss plus fair value change of contingent consideration, share-based compensation expense, interest (income) expense, income tax, and depreciation. Kaixin believes that Adjusted EBITDA helps it to identify underlying trends in its business that could otherwise be distorted by the effect of certain expenses and income that it includes in net loss. Kaixin believes that Adjusted EBITDA provides useful information about its operating results, enhances the overall understanding of its past performance and future prospects and allows for greater visibility with respect to key metrics used by Kaixin’s management in its financial and operational decision-making.

 

Adjusted EBITDA should not be considered in isolation or construed as an alternative to net loss or any other measure of performance or as an indicator of our operating performance. Investors are encouraged to review the historical non-GAAP financial measure to the most directly comparable GAAP measure. Adjusted EBITDA presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to Kaixin’s data. Investors and others are encouraged to review Kaixin’s financial information in its entirety and not rely on a single financial measure.

 

The table below sets forth a reconciliation of our net loss to Adjusted EBITDA for the periods indicated:

 

    Years ended December 31,     6 months ended June 30,  
    2015     2016     2017     2017     2018  
    US$     US$     US$     US$     US$  
    (in thousands)  
Net loss     (7,371 )     (24,054 )     (28,695 )     (8,457 )     (30,843 )
Add:                                        
Fair value change of contingent consideration                 2,601             8,068  
Share-based compensation expense     476       3,707       4,502       2,251       9,827  
Interest (income) expenses     (77 )     (6 )     2,166       717       1,399  
Income tax expenses     1,859       1,690       1,158       1,336       1,110  
Depreciation     9       51       42       19       34  
Adjusted EBITDA     (5,104 )     (18,612 )     (18,226 )     (4,134 )     (10,405 )

 

 15 

 

 

Summary Operating Data

 

The table below sets forth the summary operating data for the periods indicated:

 

  

As of and for the
three months ended

 
  

Sep. 30,
2017

  

Dec. 31,
2017

  

Mar. 31,
2018

  

Jun. 30,
2018

 
Number of Dealerships   10    14    14    15 
GMV (in US$ (millions))(1)(2)(3)   44.6    91.4    138.8    129.5 
Average monthly GMV per quarter per Dealership (in US$ (millions))(1)(2)   1.6    2.9    3.3    3.0 
Number of cars sold(1)(2)   773    1,427    1,955    1,706 
Average sales price (in US$ (thousands))(1)(2)   57.7    64.0    71.0    75.9 
Number of car sales transactions with financing products sold(1)(2)   1,038    2,045    2,579    2,791 
Loan facilitation volume (in US$ (millions))(1)(2)   20.5    45.5    59.4    62.6 
Number of car sales transactions with interim financing(1)(2)   765    1,593    1,294    429 
Number of cars sourced(1)(2)   1,523    1,699    1,815    1,452 
Inventory number(1)(2)   1,002    1,315    1,206    998 
Inventory turnover days(1)   78    90    71    65 
Average number of employees per Dealership   13    13    13    11 

 

 

Note:

Pursuant to the Business Combination, Kaixin has transferred its Ji’nan Dealership to Renren, such that at the completion of the Business Combination, Kaixin is expected to have 14 Dealerships, subject to any additional Dealership acquisitions by Kaixin. This asset transfer may affect the future results of Kaixin, including these operating data. For reference, for the six months ended June 30, 2018, the Ji’nan Dealership’s operating data was as follows: Number of dealerships: 1, GMV (in US$ millions): 59, Average monthly GMV (in US$ (millions)): 9.9, number of cars sold: 528, average sales price (in US$ (thousands)): 111.8, number of car sales transactions with financing products sold: 20, loan facilitation volume (in US$ millions)): nil, number of car sales transactions with interim financing: nil, number cars sourced 409, inventory number: 59, inventory turnover days: 46, average number of employees: 17.

 

(1)Includes auto sales transactions at our Dealerships including cars owned by Kaixin and cars sourced by Kaixin Affiliated Network Dealers that Kaixin sells pursuant to profit-sharing arrangements.

 

(2)For the periods presented, cars sourced from Kaixin Affiliated Network Dealers were immaterial.

 

  (3) GMV includes the full sales price of cars sourced from the Affiliated Network Dealers, in contrast with is automobile sales revenue, which amount only includes the corresponding revenue generated from cars sourced from the Affiliated Network Dealers on a net basis. For the second half of 2017, GMV consisted of US$136.0 million of merchandise value sourced directly by Kaixin, and US$nil of merchandise value sourced from Kaixin Affiliated Network Dealers. For the six months ended June 30, 2018, GMV consisted of US$264.1 million of merchandise value sourced directly by Kaixin, and US$4.2 million of merchandise value sourced from Kaixin Affiliated Network Dealers.

 

The above operating metrics should not be considered in isolation or construed as an alternative to Kaixin’s financial information or any other measure of performance. Investors are encouraged to review Kaixin’s historical financial information in connection with these above operating metrics. Operating metrics presented here may not be comparable to similarly titled measures presented by other companies. Other companies may calculate similarly titled measures differently, limiting their usefulness as comparative measures to Kaixin’s data. Investors and others are encouraged to review Kaixin’s operating and financial information in their entirety and not rely on a single operating metric or financial measure.

 

 16 

 

 

COMPARATIVE PER SHARE INFORMATION

 

The following table sets forth the per share data of CM Seven Star on a stand-alone basis and the unaudited pro forma condensed combined per share data for the year ended December 31, 2017 and the nine months ended September 30, 2018 after giving effect to the Business Combination, (1) assuming no CM Seven Star stockholders exercise redemption rights with respect to their common stock upon the consummation of the Business Combination; and (2) assuming that CM Seven Star stockholders exercise their redemption rights with respect to a maximum of 20,413,625 shares of common stock upon consummation of the Business Combination.

 

The pro forma book value per share information was computed as if the Business Combination had been completed on September 30, 2018. The pro forma earnings from continuing operations information for the year ended December 31, 2017 and the nine months ended September 30, 2018 was computed as if the Business Combination had been completed on January 1, 2017.

 

The historical book value per share is computed by dividing total common shareholders’ equity by the number of shares of common stock outstanding at the end of the period. The pro forma combined book value per share is computed by dividing total pro forma common shareholders’ equity by the pro forma number of shares of common stock outstanding at the end of the period. The pro forma earnings from continuing operations per share of the combined company is computed by dividing the pro forma income from continuing operations by the pro forma weighted-average number of shares outstanding over the period.

 

You should read the information in the following table in conjunction with the selected historical financial information summary included elsewhere in this proxy statement/prospectus, and the historical financial statements of CM Seven Star and Kaixin and related notes that are included elsewhere in this proxy statement/prospectus. The unaudited CM Seven Star and Kaixin pro forma combined per share information is derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial statements and related notes included elsewhere in this proxy statement/prospectus.

 

The unaudited pro forma combined earnings per share information below does not purport to represent the earnings per share which would have occurred had the companies been combined during the periods presented, nor earnings per share for any future date or period. The unaudited pro forma combined book value per share information below does not purport to represent what the value of CM Seven Star and Kaixin would have been had the companies been combined during the periods presented.

 

   (in thousands, except share and per share data) 
Nine Months Ended
September 30, 2018
  Kaixin
(historical)
   CM Seven Star
(historical)
   Pro Forma
Combined
Assuming No
redepmtions
(Unaudited)
   Pro Forma
Combined
Assuming
Maximum
redepmtions
(Unaudited)
 
Income (loss) from continuing operations  $(46,506)  $2,146   $(56,937)  $(56,937)
Stockholders’ equity (deficit)  $(1,878)  $5,000   $335,878   $126,516 
Weighted average shares outstanding — basic and diluted        26,323,092    61,439,494    40,803,201 
Basic and diluted income/(loss) per share from continuing operations       $0.08   $(0.93)  $(1.40)
Book value per share as of September 30, 2018       $0.19   $5.47   $3.10 
                     
Year Ended December 31, 2017                    
Income (loss) from continuing operations  $(30,162)  $337   $(30,623)  $(30,623)
Weighted average shares outstanding—basic and diluted        5,803,121    61,439,493    40,803,201 
Basic and diluted income/(loss) per share from continuing operations       $0.06   $(0.50)  $(0.75)

 

PRICE RANGE OF SECURITIES AND DIVIDENDS

 

CM Seven Star’s units, shares, warrants and rights are each quoted on the Nasdaq Stock Market, under the symbols “CMSSU,” “CMSS,” “CMSSW,” and “CMSSR,” respectively. Each of CM Seven Star’s units consist of one ordinary share, one-half of a redeemable warrant, and one right to acquire 1/10 of an ordinary share of CM Seven Star. CM Seven Star’s units commenced trading on October 26, 2017. CM Seven Star’s shares, warrants and rights commenced trading on November 6, 2017.

 

The table below sets forth the high and low bid prices of CM Seven Star’s ordinary shares, warrants, rights, and units as reported on the Nasdaq Stock Market for the period from November 6, 2017, 2017 (the date on which our ordinary shares, warrants and rights were first quoted on the Nasdaq Stock Market) through October 31, 2018 and for the period from October 26, 2017 (the date on which our units were first quoted on the Nasdaq Stock Market) through October 31, 2018.

 

    Ordinary Shares   Warrants   Rights   Units 
Period Ended   High   Low   High   Low   High   Low   High   Low 
December 31, 2017   $9.66   $9.59   $0.30   $0.25   $0.35   $0.25   $10.07   $9.93 
March 31, 2018   $9.80   $9.63   $0.38   $0.20   $0.35   $0.21   $10.35   $9.97 

June 30, 2018

    9.91    9.72    0.41    0.32    0.38    0.27    10.20    10.50 
September 30, 2018   $11.00   $9.88   $0.55   $0.38   $0.59   $0.32   $11.00   $10.33 
December 31, 2018*   $10.10   $10.03   $0.50   $0.39   $0.55   $0.35   $11.00   $10.70 

* Through October 31, 2018

 

CM Seven Star has not paid any cash dividends on its ordinary shares to date and does not intend to pay cash dividends prior to the completion of a business combination. The payment of cash dividends in the future will be dependent upon CM Seven Star’s revenues and earnings, if any, capital requirements and general financial condition subsequent to completion of a business combination. The payment of any dividends subsequent to a business combination will be within the discretion of its then board of directors. It is the present intention of CM Seven Star’s board of directors to retain all earnings, if any, for use in its business operations and, accordingly, CM Seven Star’s board does not anticipate declaring any dividends in the foreseeable future.

 

Kaixin’s securities are not publicly traded.

 

 17 

 

 

RISK FACTORS

 

You should consider carefully the following risk factors, as well as the other information set forth in this proxy statement, before making a decision on the Business Combination.

 

Risks Relating to Kaixin’s Business and Industry

 

Kaixin has a history of losses and it may not achieve or maintain profitability in the future.

 

Kaixin has not been profitable since its inception and had an accumulated deficit of approximately US$56.9 million as of December 31, 2017 and US$87.6 million as of June 30, 2018. Kaixin incurred net losses of US$7.4, million US$24.1 million, US$28.7 million and US$30.8 million, respectively, in 2015, 2016, 2017 and the six months ended June 30, 2018. Kaixin expects to make significant investments to further develop and expand its business and these investments may not result in increased revenues or growth on a timely basis or at all. In addition, as a public company, Kaixin will incur significant legal, accounting and other expenses that Kaixin did not incur as a subsidiary of a listed company. As a result of these increased expenditures, Kaixin will have to generate and sustain increased revenues to achieve and maintain profitability.

 

Kaixin expects to continue to incur losses at least in the near term as Kaixin invests in and strives to grow its business. Kaixin may also incur significant losses in the future for a number of reasons, including possible changes in general economic conditions and regulatory environment, slowing demand for used cars and its related products and services, increasing competition, weakness in the automotive retail industry generally, as well as other risks described in this proxy statement, and Kaixin may encounter unforeseen expenses, difficulties, complications and delays in generating revenues or profitability. If growth in its revenues slows, Kaixin may not be able to reduce costs in a timely manner. In addition, if Kaixin reduces variable costs to respond to losses, this may limit its ability to acquire customers and grow its revenues. Accordingly, Kaixin may not achieve or maintain profitability and may continue to incur significant losses in the future.

 

Kaixin has a limited operating history under its current business model. Kaixin’s historical financial and operating performance may not be indicative of, or comparable to, its future prospects and results of operations.

 

Although Kaixin was formed in 2011, it has changed its business model significantly since its initial launch. Kaixin began as primarily an internet-based financing business and has developed into a used car retailer with strong online and offline presence.

 

As a result, Kaixin’s business model has not been fully proven, and Kaixin has only a limited operating history with its new business model against which to evaluate its business and future prospects, which subjects Kaixin to a number of uncertainties. Additionally, Kaixin intends to continue to expand its Dealership network, and such growth may make financial information for future periods less comparable to prior periods. Accordingly, Kaixin’s historical financial results should not be considered indicative of its future performance and may be less comparable to financial results for future periods.

 

Additionally, Kaixin has limited experience in most aspects of its business operations, including online/offline auto sales operations, financing facilitation and other value-added services and the development of long-term relationships with platform participants, such as dealers, financial institutions and car buyers. Kaixin has encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, including achieving market acceptance of its platform, attracting and retaining customers, expanding its partnerships and the scope of its platform, increasing competition, and increasing expenses as Kaixin continues to grow its business. Kaixin cannot assure you that it will be successful in addressing these and other challenges Kaixin may face in the future and if it does not manage these risks successfully, its business may be adversely affected. In addition, Kaixin may not achieve sufficient revenues to achieve or maintain positive cash flow from operations or profitability in any given period. If Kaixin’s assumptions regarding these risks and uncertainties, which it uses to plan its business, are incorrect, or if it does not address these risks successfully, its operating and financial results could differ materially from its expectations, and Kaixin’s business could suffer.

 

 18 

 

 

The laws and regulations governing the auto industry in the PRC are still at a nascent stage and subject to further changes and interpretation. As the market, the regulatory environment and other conditions evolve, Kaixin’s existing solutions and services may not continue to deliver the expected business results. As its business develops and responds to competition, Kaixin may continue to introduce new services, make adjustments to its existing services, business model or operations in general. Kaixin’s ability to retain Dealerships, financial institutions, customers and other platform participants and to attract new platform participants are also critical to its business. Any significant change to its business model or failure to achieve the intended business results may have a material and adverse impact on Kaixin’s financial condition and results of operations. Therefore, it may be difficult to effectively assess its future prospects.

 

Kaixin’s recent, rapid growth may not be indicative of its future growth and, if it continues to grow rapidly, it may not be able to manage its growth effectively.

 

Kaixin’s net revenues grew from US$4.8 million in 2015 to US$20.8 million in 2016 to US$149.9 million in 2017. Its net revenues were US$253.3 million in the six months ended June 30, 2018. Kaixin expects that, in the future, even if its revenues increase, its rate of revenue growth may decline. In any event, Kaixin will not be able to grow as fast or at all if it does not:

 

increase the number of users on its mobile apps and websites and increase the number of customers of its used auto sales business;

 

further improve the quality of its product and service offerings, features and complementary

 

products and services, and introduce high quality new products, services and features;

 

introduce additional third party products and services; or

 

acquire sufficient appropriate inventory at an attractive cost and high quality to meet the increasing demand for its vehicles.

 

There can be no assurance that Kaixin will meet these objectives. Kaixin expects to continue to expend substantial financial and other resources on:

 

marketing and advertising;

 

expansion of its vehicle inventory; and

 

general administration, including legal, accounting and other compliance expenses.

 

Kaixin’s historical rapid growth has placed and may continue to place significant demands on its management and its operational and financial resources, as Kaixin experiences further growth in the number of users of its platform as well as the amount of data that Kaixin analyzes. Kaixin has hired and expects to continue to hire additional personnel to support its rapid growth. Kaixin’s organizational structure is becoming more complex as Kaixin adds staff, and it will need to improve its operational, financial and management controls as well as its reporting systems and procedures. Kaixin will require significant capital expenditures and the allocation of valuable management resources to grow and change in these areas without undermining its corporate culture of rapid innovation, teamwork and attention to the car buying experience for the consumer. If Kaixin cannot manage its growth effectively to maintain the quality and efficiency of its customers’ car buying experience and the quality of the vehicles it sells, its business could be harmed and its results of operations and financial condition could be materially and adversely affected.

 

Kaixin’s business has grown rapidly as additional customers have purchased used cars and complementary products and services through its platform. However, Kaixin’s business is relatively new and has operated at substantial scale for only a limited period of time. Given this limited history, it is difficult to predict whether Kaixin will be able to maintain or grow its business. Kaixin also expects that its business will evolve in ways that may be difficult to predict. For example, over time its investments intended to drive new customer traffic to its website may be less productive than expected. In the event of this or any other adverse developments, Kaixin’s continued success will depend on its ability to successfully adjust its strategy to meet changing market dynamics. If Kaixin is unable to do so, its business could be harmed and its results of operations and financial condition could be materially and adversely affected.

 

 19 

 

 

Kaixin’s Dealerships conduct many aspects of its business, and Kaixin faces risks associated with its Dealerships, their employees and other personnel.

 

Kaixin relies on its Dealerships to conduct significant aspects of its business. As of June 30, 2018, it had 15 Dealerships. Pursuant to the Business Combination, Kaixin transferred its Ji’nan Dealership to Renren, such that at the completion of the Business Combination, Kaixin is expected to have 14 Dealerships, subject to any additional Dealership acquisitions by Kaixin. Kaixin’s control over its Dealerships may not be as effective as if Kaixin fully owned these partners’ businesses, which could potentially make it difficult for Kaixin to manage them.

 

Kaixin’s Dealerships and their employees directly interact with consumers, other dealerships and other platform participants, and their performance directly affects Kaixin’s reputation and brand image. If Kaixin’s service personnel or those of its Dealerships fail to satisfy the needs of consumers, respond effectively to their complaints, or provide services to their satisfaction, its reputation and the loyalty of its customers could be negatively affected. As a result, Kaixin may lose customers or experience a decrease in business volume, which could have a material adverse effect on its business, financial condition and results of operations. Kaixin does not directly supervise the services provided by its Dealerships and their personnel and may not be able to successfully maintain and improve the quality of their services. Dealerships may also fail to implement sufficient control over their sales, maintenance and other personnel. In addition, Kaixin has developed a Kaixin Affiliated Network Dealer model pursuant to which Kaixin sources and markets used cars in its Dealerships under profit-sharing arrangements with third parties who provide these vehicles to it. Kaixin has little control over the actions of these Kaixin Affiliated Network Dealers, and their failure to comply with laws or ethical business practices may harm Kaixin’s reputation or results of operations. As a result of conduct of Dealerships or Kaixin Affiliated Network Dealers, Kaixin may suffer financial losses, incur liabilities and suffer reputational damage. In addition, while violation of laws and regulations by Dealerships and Kaixin Affiliated Network Dealers has not led to any material claims against Kaixin in the past, there can be no assurance that such a claim will not arise in the future which may harm Kaixin’s brand or reputation or have other adverse impacts. In August 2018, a notice from the Shandong Luokou police bureau was placed at the location of the Ji’nan Dealership. This notice stated that there is an ongoing investigation concerning the Dealership premises, and relevant persons must cooperate with the investigation. Kaixin understands that the investigation is concerning an individual who holds 30% of Ji’nan Dealership’s equity interest, not the Ji’nan Dealership. However, because of the co-location of certain business and assets by the Ji’nan Dealership and its 30% minority shareholder, Kaixin expects that it will need to write off certain inventory and advances to suppliers of the Ji’Nan Dealership, which totaled US$6.4 million and US$16.8 million respectively as of June 30, 2018. This transfer has been completed and accordingly, the Ji’nan Dealership is not expected to affect the business or results of operations of Kaixin in the future. Kaixin is actively monitoring the situation. For further information, see “Kaixin Auto Group’s Business – Legal Proceedings.”

 

Further, suspension or termination of a Dealership’s or a Dealership Outlet’s services in a particular geographic area may cause interruption to or failure in Kaixin’s services in the corresponding geographic area. A Dealership operator may suspend or terminate his or her services or cooperation with Kaixin for various reasons, including for those other than third-party reasons or force majeure. In connection with the Business Combination, Kaixin entered into amendment agreements with Dealership operators in January 2019 pursuant to which it was confirmed that the Business Combination qualifies as an initial public offering, and that Renren will be responsible for settling contingent obligations to Dealership operators. In addition, although this could contravene Kaixin’s agreements with them, due to the intense competition in its industry, existing Dealerships may also choose to discontinue their cooperation with Kaixin and work with its competitors instead. Kaixin may not be able to promptly replace its Dealerships or find alternative ways serve their geographic areas in a timely, reliable and cost-effective manner, or at all. As a result of any service disruptions associated with Dealerships, customer satisfaction, brand, reputation, operations and financial performance may be materially and adversely affected.

 

Kaixin may not be able to successfully expand or maintain its network of Dealerships.

 

As of June 30, 2018, Kaixin had a network of 15 Dealerships. Pursuant to the Business Combination, Kaixin has transferred its Ji’nan Dealership to Renren, such that at the completion of the Business Combination, Kaixin is expected to have 14 Dealerships, subject to any additional Dealership acquisitions by Kaixin. Kaixin’s Dealership network is a foundation of its platform, and Kaixin relies on its Dealerships in providing services to car buyers and financial institutions. Kaixin plans to expand its Dealership network as its business grows. As China is a large and diverse market, business practices and demands may vary significantly by region and Kaixin’s experience in the markets in which it currently operates may not be applicable in other parts of China. As a result, Kaixin may not be able to leverage its experience to expand its Dealership network into other parts of China. Furthermore, Kaixin’s efforts to expand into new geographical markets and attract new dealers to its platform may impose considerable burden on its sales, marketing and general managerial resources. If Kaixin is unable to manage its expansion efforts effectively, if Kaixin’s expansion efforts take longer than planned or if costs for these efforts exceed Kaixin’s expectations, its results of operations may be materially and adversely affected.

 

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Further, Kaixin may have difficulties managing its relationships with its Dealership operators once they have earned the share payouts to which they are entitled to pursuant to Kaixin’s equity purchase agreements, in which they are entitled to payment of consideration in Kaixin’s ordinary shares based on the Dealerships’ performance over five 12-month performance benchmark periods. Following the completion of these performance benchmark periods, Kaixin may need to enter into new arrangements with its Dealership operators in order to strengthen its relationships with them and incentivize their performance or begin to directly operate its Dealerships, notwithstanding Kaixin’s ownership and operational control over its Dealerships. For additional information, please see “Kaixin Auto Group’s Business — Certain Legal Arrangements — Kaixin’s Legal Arrangements with Dealerships and After-Sales Partners.”

 

Kaixin is obligated to make future issuances of its ordinary shares to the partners who operate its Dealerships and after-sales service centers.

 

Pursuant to equity purchase agreements pursuant to which Kaixin has acquired majority control of its Dealerships and certain after-sales partners, Kaixin is obligated to make certain payments of its ordinary shares to their sellers, who have retained a minority interest in the special purpose holding entity of its Dealerships and after-sales service centers, respectively. In connection with the Business Combination, Renren has agreed to bear the obligation with respect to the contingent share consideration due to Dealership operators and indemnify CM Seven Star for related liabilities.

 

As of December 31, 2017 and June 30, 2018, Kaixin carried short-term and long-term contingent consideration with a fair value amounting to US$66.8 million and US$87.0 million, respectively. Kaixin may enter into similar agreements in the future in connection with the expansion of its business, which could result in dilution to its ordinary shareholders. For additional information, please see “Business — Certain Legal Arrangements — Legal Arrangements with Dealerships and After-Sales Partners” and note [5] to the accompanying financial statements.

 

Other dealers with which Dealerships may in the future collaborate could take actions that could harm Kaixin’s business and that of its Dealerships.

 

Although Kaixin currently owns all existing Dealership Outlets and no such arrangements have been entered into to date, Kaixin may in the future permit Dealership operators to develop and operate other Dealership Outlets in their defined geographic areas in collaboration with other unrelated third parties. In such event, certain Dealership operators may elect to cooperate with third parties to develop and operate Dealership Outlets in the geographic area covered by the relevant agreement. Although Kaixin’s existing Dealership agreements contractually obligate Dealerships to operate in accordance with specified standards, including synchronization of their operations with the wider Kaixin platform and integration with its Dealer SaaS system, Kaixin may not be a party to any agreements between Dealership operators and third-party partners. As a result, Kaixin would be dependent upon Dealership operators to enforce these standards with respect to these additional dealerships and more broadly, to ensure their success. As a result, the ultimate success and quality of any additional location would on the Dealership operators. If any such additional Dealership Outlets do not successfully operate in a manner consistent with required standards, their performance, the performance of its Dealerships and ultimately, the performance of Kaixin, could be adversely affected and its brand image and reputation may be harmed, which could materially and adversely affect Kaixin’s business and operating results.

 

Any difficulties in identifying, consummating and integrating acquisitions, investments or alliances may expose Kaixin to potential risks and have an adverse effect on its business, results of operations or financial condition.

 

Kaixin has in the past made and may in the future seek to make acquisitions and investments and enter into strategic alliances to further expand its business. If it is presented with appropriate opportunities, Kaixin may acquire additional businesses, services, resources, or assets, including auto dealerships, that are accretive to its core business. There can be no assurance that Kaixin will always be able to complete such acquisitions successfully or on terms acceptable to it. Integration of entities or assets that Kaixin acquires into its business may not be successful and may prevent Kaixin from expanding into new services, customer segments or operating locations. This could significantly affect the expected benefits of these acquisitions. Moreover, the integration of any acquired entities or assets into Kaixin’s operations could require significant attention from its management. The diversion of the attention of Kaixin’s management and any difficulties encountered in any integration process could have an adverse effect on its ability to manage its business.

 

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Kaixin’s possible future acquisitions of auto dealerships, other acquisitions, investments or strategic alliances may also expose it to other potential risks, including risks associated with unforeseen or hidden liabilities, the diversion of resources from its existing businesses and technologies, its inability to generate sufficient revenues to offset the costs, expenses of acquisitions and potential loss of, or harm to, relationships with Dealerships, employees, customers as a result of its integration of new businesses. In addition, Kaixin may recognize impairment losses on goodwill arising from its acquisitions. The occurrence of any of these events could have a material and adverse effect on Kaixin’s ability to manage its business, its financial condition and results of operations.

 

The quality of the premium used automobiles Kaixin offers is critical to the success of its business.

 

Kaixin offers a wide selection of premium used cars for sale at its Dealerships. Kaixin has implemented high standards for the used car inventory it offers for sale and only offers for sale vehicles that are able to pass its thorough inspection process consisting of over 140 steps. Kaixin does not offer for sale vehicles which are in poor condition, have a history of accidents, water or fire damage and extensive mileage, or other unacceptable attributes. However, there can be no assurance that these inspections and other measures will be effective, and there is a risk that the automobiles offered for sale on Kaixin’s platform could have defects. As a result, Kaixin and its Dealerships are exposed to product liability claims relating to personal injury or property damage and may require product recalls or other actions. Third parties subject to such injury or damage may bring claims or legal proceedings against Kaixin or its Dealerships as a result of the sale of such products.

 

In addition, Kaixin has developed a Kaixin Affiliated Network Dealer model pursuant to which it sources and markets used cars at Dealerships under profit-sharing arrangements with third parties who provide these vehicles. Although Kaixin screens and recondition these vehicles according to the same procedures as its other used vehicles, Kaixin may have less control of the inventory sourced through this model and faces risks relating to the activities of Kaixin Affiliated Network Dealers with whom it cooperates. Any defects in the used or new cars Kaixin offers for sale, whether or not they are actually sold to customers, could have a material and adverse impact on Kaixin’s reputation, results of operation and financial condition.

 

Kaixin’s success depends upon the continued contributions of its salespeople.

 

Kaixin’s salespeople, who are primarily employed by its Dealerships, are a driving force behind its success. Kaixin believes that one factor that distinguishes it is its culture centered on valuing all salespeople. Any failure to maintain this culture or to continue recruiting, developing and retaining the salespeople that drive Kaixin’s success could have a material adverse effect on its business, sales and results of operations. Kaixin also faces risks related to the loyalty of its salespeople. Referrals of leads by salespeople to friends or others in side deals is a common phenomenon in its industry in China, and if Kaixin’s salespeople seek to profit themselves personally at the expense of it, this could hurt its business and results of operations. Kaixin’s ability to recruit salespeople while controlling related costs is subject to numerous external and internal factors, including unemployment levels, prevailing wage rates, growth plans, changes in employment legislation, and competition for qualified employees in the industry and regions in which Kaixin operates. This competition is especially fierce for qualified service technicians. Kaixin’s ability to recruit salespeople while controlling related costs is also subject to its ability to maintain positive employee relations. If Kaixin is unable to do so, or if, despite its efforts, becomes subject to successful unionization efforts, it could increase costs, limit Kaixin’s ability to respond to competitive threats and have a material adverse effect on its business, sales and results of operations.

 

Kaixin’s success also depends upon the continued contributions of its Dealership, regional and corporate management teams. Consequently, the loss of the services of any of key personnel could have a material adverse effect on Kaixin’s business, sales and results of operations. In addition, an inability to build its management bench strength to support growth could have a material adverse effect on Kaixin’s business, sales and results of operations.

 

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Kaixin relies on a limited number of financial institutions to fund the consumer auto financing transactions it facilitates, and any adverse change in its relationships with such financial institutions may materially and adversely impact Kaixin’s business and results of operations.

 

Kaixin relies on a limited number of financial institutions to fund financing transactions to car buyers. Loans from Ping An Bank, Shanghai Branch accounted for substantially all of the loans it facilitated to consumers through Kaixin’s consumer auto loan financing facilitation business in 2017 and the six months ended June 30, 2018. Kaixin has also entered into an agreement with another major PRC financial institution and anticipate that financing from such institution will comprise a substantial proportion of the financing facilitated by Kaixin’s platform in the future. The availability of funding from financial institutions depends on many factors, some of which are out of Kaixin’s control. Financial institutions may find Kaixin’s services to be ineffective, or its service fees to be expensive. Customers who enter into financing arrangements may fail to effectively pledge their purchased cars as collateral in connection with the financing arrangements. In addition, delinquencies by Kaixin’s customers may also lead financing partners to limit or terminate their relationships with it. For further information as to Kaixin’s arrangements with these financial institutions, see “Kaixin Auto Group’s Business — Certain Legal Arrangements — Legal Arrangements with Financial Institutions.” There can be no assurance that Kaixin will be able to rely on such funding arrangements in the future or that it would be able to replace one of its financing partners in the event they cease their relationship with it. Although Kaixin continues to identify new financial institutions to collaborate with, there can be no assurance that the number of financial institutions it collaborates with will become increasingly diversified in the future. Given Kaixin’s current dependence on a relatively small number of financial institutions, if its relationship with any such institution or their channel partners deteriorates, if any such financial institution determines not to collaborate with Kaixin or limits the funding that is available for financing transactions facilitated by Kaixin, or if any such financial institution encounters liquidity issues in general, Kaixin’s business, financial condition and results of operations may be materially and adversely affected.

 

Further, Ping An Bank, Shanghai Branch and other financing institutions can significantly influence the terms of Kaixin’s consumer auto finance loans, including the interest rates, term and collateral provisions, and Kaixin has little influence over these terms. In order to maintain and foster its cooperation with Ping An Bank, Shanghai Branch and other financing institutions, Kaixin may have to accommodate demands that they may impose on it in the future. Such demands and requirements may increase costs to Kaixin, weaken its connection with customers, or even be disruptive to its existing auto loan financing facilitation business. In addition, Ping An Bank, Shanghai Branch and other financing institutions also cooperate with certain of Kaixin’s competitors and, as a result, may have interests which are adverse or in conflict with Kaixin’s, which could harm its business and materially and adversely affect its results of operations.

 

In addition, Kaixin’s ability to collaborate with financial institutions may become subject to new regulatory limitations, as the laws and regulations governing the automotive finance industry in the PRC continue to evolve. In the event there is a sudden or unexpected shortage of funds from financial institutions Kaixin collaborates with or if they experience disruption to their operations for any reason, Kaixin’s ability to serve car buyers will be adversely affected. Kaixin may from time to time experience constraints as to the availability of funds from financial institutions, especially as its business continues to grow and the need for funding increases. Such constraints may affect user experience, including by limiting the approval of customers’ credit applications. Such limitations may also restrain the growth of Kaixin’s business. Any prolonged constraint as to the availability of funds from financial institutions may also harm Kaixin’s reputation or result in negative perception of the services it offers, thereby decreasing the willingness of prospective car buyers to seek automotive financing solutions offered by its partners or the willingness of dealers and other platform participants to collaborate with Kaixin.

 

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Kaixin may need additional capital to pursue its business objectives and respond to business opportunities, challenges or unforeseen circumstances, and financing may not be available on terms acceptable to Kaixin, or at all.

 

Since inception, Kaixin has relied on Renren, its parent company, to support Kaixin’s operations, the expansion of its Dealerships and the growth of its business, as well as certain third party financing sources, including financial institutions and the issuance of ABSs. As Kaixin intends to continue to make investments to support the growth of its business, it may require additional capital to pursue its business objectives and respond to business opportunities, challenges or unforeseen circumstances, including increasing the number of cars it sells, developing new solutions and services, increasing its sales and marketing expenditures to improve brand awareness and engage car buyers through expanded online channels, enhancing Kaixin’s operating infrastructure and acquiring complementary businesses and technologies. However, additional funds may not be available when Kaixin needs them, on terms that are acceptable to it, or at all. Repayment of debt may divert a substantial portion of cash flow to repay principal and service interest on such debt, which would reduce the funds available for expenses, capital expenditures, acquisitions and other general corporate purposes; and Kaixin may suffer default and foreclosure on its assets if Kaixin’s operating cash flow is insufficient to service debt obligations, which could in turn result in acceleration of obligations to repay the indebtedness and limit Kaixin’s sources of financing.

 

Volatility in the credit markets may also have an adverse effect on Kaixin’s ability to obtain debt financing. If Kaixin raises additional funds through further issuances of equity or convertible debt securities, its existing shareholders could suffer significant dilution, and any new equity securities Kaixin issues could have rights, preferences and privileges superior to those of holders of Kaixin’s ordinary shares. If Kaixin is unable to obtain adequate financing or financing on terms satisfactory to it when Kaixin requires it, Kaixin’s ability to continue to pursue its business objectives, fund its Dealerships and respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and its business, financial condition, results of operations and prospects could be adversely affected.

 

Kaixin operates in a highly competitive industry. Failure to develop and execute strategies to maintain its market position and to adapt to the increasing use of the internet to market, buy, sell and finance used vehicles could adversely affect its business, sales and results of operations.

 

Automotive retailing is a highly competitive and highly fragmented industry in China, according to iResearch. Kaixin’s competition includes publicly and privately owned used and new car dealers and online and mobile sales platforms, as well as millions of private individuals. Competitors buy and sell the same or similar makes of vehicles that Kaixin offers in the same or similar markets at competitive prices.

 

Retail Competition. Some of Kaixin’s competitors have announced plans for rapid expansion, including into markets with Kaixin locations, and some of them have begun to execute those plans. If Kaixin fails to respond effectively to its retail competitors, it could have a material adverse effect on Kaixin’s business, sales and results of operations.

 

Online Sales and Facilitation. Although mobile apps and online marketing are important to Kaixin’s own business model, the increasing use of the internet to market, buy and sell used vehicles and to provide vehicle financing could have a material adverse effect on Kaixin’s sales and results of operations. Emerging competitors using online focused business models, both for direct sales and consumer-to-consumer facilitation, could materially impact Kaixin’s current business model. The online availability of used vehicle information from other sources, including pricing information, could make it more difficult for Kaixin to differentiate its customer offering from competitors’ offerings, could result in lower-than-expected retail margins, and could have a material adverse effect on Kaixin’s business, sales and results of operations. In addition, Kaixin’s competitive standing is affected by companies, including search engines and online classified sites, that are not direct competitors but that may direct online traffic to the websites of competing automotive retailers. The increasing activities of these companies could make it more difficult for Kaixin to attract users to its mobile app. These companies could also make it more difficult for Kaixin to otherwise market its vehicles online.

 

The increasing use of the internet to facilitate consumers’ purchases and sales of their current vehicles could have a material adverse effect on Kaixin’s ability to source vehicles, which in turn could have a material adverse effect on its vehicle acquisition costs and results of operations. For example, certain websites provide online appraisal tools to consumers that generate offers and facilitate purchases by dealers other than Kaixin.

 

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In addition to the direct competition and increasing use of the internet described above, there are companies that sell software and data solutions to used and new car dealers to enable those dealers to, among other things, more efficiently source and price inventory. Although these companies do not compete with Kaixin, the increasing use of such products by dealers who compete with Kaixin could reduce the relative competitive advantage of Kaixin’s internally developed proprietary systems.

 

If Kaixin fails to respond effectively to competitive pressures or to changes in the used vehicle marketplace, it could have a material adverse effect on Kaixin’s business, sales and results of operations.

 

Kaixin operates in an evolving and fast-changing market.

 

The automotive retail market, including the consumer automotive finance market, in the PRC is highly dynamic and is at an early stage of development. While it has undergone significant growth in the past few years, there is no assurance that it can continue to grow as rapidly. As part of Kaixin’s business, it offers retail auto sales of premium used vehicles, financing, including consumer loans provided by its financing partners, automobile insurance providers and value-added services to various participants in the automotive transaction value chain, including dealers, financial institutions, car buyers, service providers and other industry participants. Helping more industry participants to recognize the value of Kaixin’s services in a rapidly-evolving market is critical to increasing the number and amount of used cars and other transactions Kaixin completes and to the success of its business.

 

You should consider Kaixin’s business and prospects in light of the risks and challenges it encounters or may encounter given the rapidly-evolving market in which it operates and its limited operating history. These risks and challenges include Kaixin’s ability to, among other things:

 

          source, market and sell used and new automobiles in substantial volumes and on favorable terms;

 

          effectively manage and expand its network of Dealerships;

 

          facilitate automotive financing to a growing number of car buyers;

 

          maintain and enhance its relationships and business collaboration with dealers, financial institutions and other platform participants;

 

          charge competitive service fees to platform participants while driving the growth and profitability of its business;

 

          improve its operational efficiency;

 

          attract, retain and motivate talented employees, particularly sales and marketing and technology personnel to support its business growth;

 

          adapt to technological change, such as the development of autonomous vehicles, new products and services, new business models and new methods of travel;

 

          enhance its technology infrastructure to support the growth of its business and maintain the security of its system and the confidentiality of the information provided and collected across its system;

 

          navigate economic conditions and fluctuations;

 

          implement its business strategies, including the offering of new services; and

 

          defend Kaixin against legal and regulatory actions, such as actions involving intellectual property or data privacy claims.

 

If Kaixin is unable to adapt to any of these factors in its rapidly-evolving market, its business, performance and results of operations could suffer.

 

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Kaixin’s success depends on its ability to attract prospective car buyers.

 

The growth of Kaixin’s business depends on its ability to attract prospective car buyers. Kaixin primarily purchases car models that are reliable, reasonably-priced and based on its insights as to car buyers, feedback from registered dealers and market analysis as to perception and demand for such models, will appeal to car buyers in lower-tier cities. Kaixin prices cars based on its insights derived from automotive transaction data associated with the facilitation of automotive financing solutions as well as data from other automotive transactions. Kaixin has limited experience in the purchase of cars for sale, and there is no assurance that Kaixin will be able to do so effectively. Demand for the type of cars that Kaixin purchases can change significantly between the time the cars are purchased and the date of sale. In addition, the models offered by Kaixin’s Dealerships may not be popular among prospective car buyers, which could materially and adversely affect Kaixin’s business, results of operations and financial condition. Demand may be affected by new car launches, changes in the pricing of such cars, defects, changes in consumer preference and other factors. Kaixin may also need to adopt more aggressive pricing strategies for the cars it purchases than originally anticipated to stoke consumer demand. Kaixin faces inventory risk in connection with the cars purchased, including the risk of inventory obsolescence, decline in value, and significant inventory write-downs or write-offs. If Kaixin were to adopt more aggressive pricing strategies, its profit margin may be negatively affected as well. Kaixin may also face increasing costs associated with the storage of inventory. Any of the above may materially and adversely affect Kaixin’s financial condition and results of operations.

 

In order to expand Kaixin’s base of car buyers, it must continue to invest significant resources in the development of new solutions and services and build its relationships with financial institutions, auto dealers and other platform participants. Kaixin’s ability to successfully launch, operate and expand its solutions and services and to improve user experience to attract prospective car buyers depends on many factors, including its ability to anticipate and effectively respond to the changing interests and preferences of car buyers, anticipate and respond to changes in the competitive landscape, and develop and offer solutions and services that address the needs of car buyers on Kaixin’s platform. If Kaixin’s efforts in these regards are unsuccessful, its base of car buyers may not increase at the rate Kaixin anticipates, and it may even decrease. As a result, Kaixin’s business, prospects, financial condition and results of operations may be materially and adversely affected.

 

In addition, in order to attract prospective car buyers, Kaixin must also devote significant resources to enhancing the experience of car buyers on its platform on an ongoing basis. Kaixin must enhance the functionality and ensure the reliability of its platform. If Kaixin fails to provide superior customer service or address complaints of car buyers on its platform in a timely manner, it may fail to attract prospective car buyers as to its solutions and services, and the number of financing transactions it facilitates may decline.

 

In the meantime, Kaixin also seeks to maintain its relationships with existing car buyers and cross-sell new solutions and services, such as insurance and wealth management products. However, there can be no assurance that Kaixin will be able to maintain or deepen such relationships.

 

The growth of Kaixin’s business relies on its branding efforts and these efforts may not be successful.

 

Kaixin Auto brand was newly launched in the first half of 2018 and Kaixin believes that an important component of its growth will be the growth of visitors to its website and Dealerships. Because Kaixin is a consumer brand, brand visibility is critical for its engagement with potential customers. Kaixin currently advertises through a blend of brand and direct advertising channels with the goal of increasing the strength, recognition and trust in the Kaixin Auto brand and driving more unique visitors to its website. Kaixin recorded selling and marketing expenses of approximately US$1.4 million, US$8.0 million, US$10.9 million and US$13.6 million in 2015, 2016, 2017 and the six months ended June 30, 2018, respectively.

 

Kaixin’s business model relies on its ability to scale rapidly and to appropriately manage customer acquisition costs as it grows. If Kaixin is unable to establish a strong and trusted brand and recover its marketing costs through increases in customer traffic and in the number of transactions by users of its platform, or if its broad marketing campaigns are not successful or are terminated, it could have a material adverse effect on Kaixin’s growth, results of operations and financial condition.

 

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Any harm to Kaixin’s brand or reputation or any damage to the reputation of third parties or failure to enhance Kaixin’s brand recognition could have a material adverse effect on its results of operations and growth prospects.

 

Enhancing the recognition and reputation of Kaixin’s brand is critical to its business and competitiveness. Factors that are vital to this objective include but are not limited to Kaixin’s ability to:

 

          maintain the quality and reliability of its platform;

 

          maintain and develop relationships with auto dealers and financial institutions;

 

          provide prospective car buyers and existing car buyers with superior experiences;

 

          effectively manage and resolve any complaints of car buyers, auto dealers Kaixin works with or financial institutions; and

 

          effectively protect personal information and privacy of car buyers and any sensitive data received from financial institutions.

 

Any malicious or inadvertent negative allegations made by the media or other parties about the foregoing or other aspects of the company, including but not limited to its management, business, compliance with law, financial condition or prospects, whether with or without merit, could severely hurt Kaixin’s reputation and harm its business and results of operations.

 

Negative publicity about China’s automotive finance industry in general may also have a negative impact on Kaixin’s reputation, regardless of whether Kaixin has engaged in any inappropriate activities. Furthermore, any negative development in the automotive retailing industry, such as bankruptcies or failures of platforms providing automotive retailing services, and especially a large number of such bankruptcies or failures, or negative perception of the industry as a whole, even if factually incorrect or based on isolated incidents, could compromise Kaixin’s image, undermine the trust and credibility it has established and impose a negative impact on its ability to attract new dealers, financial institutions, car buyers and other platform participants. Negative developments in the automotive retailing industry may also lead to tightened regulatory scrutiny of the sector and limit the scope of permissible business activities that may be conducted by companies like Kaixin. If any of the foregoing takes place, Kaixin’s business and results of operations could be materially and adversely affected.

 

Kaixin collaborates with various automotive transaction industry participants in providing its solutions and services. Such participants include dealers, financial institutions, sales agents, insurance brokers and companies and other business partners. Negative publicity about such counterparties, including any failure by them to adequately protect the personal information of car buyers, to comply with applicable laws and regulations or to otherwise meet required quality and service standards could harm Kaixin’s reputation.

 

Kaixin relies on Internet search engines, social networking sites and third-party automotive sales platforms to help drive traffic to its website and mobile app, and if it fails to appear prominently in the search results or fails to drive traffic through paid advertising, its traffic would decline and its business would be adversely affected.

 

Kaixin depends in part on Internet search engines, social networking sites and third-party auto sales platforms to drive traffic to its website and mobile app. Kaixin’s ability to maintain and increase the number of visitors directed to its website and mobile app is not entirely within its control. Kaixin’s competitors may increase their search optimization efforts and outbid Kaixin for search terms on various search engines, resulting in their websites receiving a higher search result page ranking than Kaixin’s. Additionally, Internet search engines and third-party auto sales platforms could revise their methodologies in a way that would adversely affect Kaixin’s search result rankings. If Internet search engines and third-party auto sales platforms modify their search algorithms in ways that are detrimental to Kaixin, or if Kaixin’s competitors’ efforts are more successful than Kaixin’s, overall growth in its customer base could slow or its customer base could decline. Internet search engine providers could display automotive dealer and pricing information directly to users in search results, align with Kaixin’s competitors or choose to develop competing services. Kaixin expects that its website and mobile app will experience fluctuations in search result rankings in the future. Any reduction in the number of users directed to Kaixin’s website and mobile app through Internet search engines, social networking sites and third-party auto sales platforms could harm its business and operating results.

 

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Kaixin’s ability to grow its complementary product and service offerings may be limited, which could negatively impact its growth rate, revenues and financial performance.

 

If Kaixin introduces or expands additional offerings for its platform, such as services or products involving new cars, financing, leasing or detailing, it may incur losses or otherwise fail to enter these markets successfully. Kaixin’s expansion into these markets will place it in competitive and regulatory environments with which it is unfamiliar and involve various risks, including the need to invest significant resources and the possibility that returns on such investments will not be achieved for several years, if at all. In attempting to establish new service or product offerings, Kaixin expects to incur significant expenses and face various other challenges, such as expanding its customer service and management personnel to cover these markets and complying with complicated regulations that apply to these markets. In addition, Kaixin may not successfully demonstrate the value of these complementary products and services to consumers, and failure to do so would compromise its ability to successfully expand into these additional streams of revenues. Any of these risks, if realized, could adversely affect its business and results of operations.

 

The automotive retail industry in general and Kaixin’s business in particular are sensitive to economic conditions. These conditions could adversely affect its business, sales, results of operations and financial condition.

 

Kaixin is subject to national and regional economic conditions. These conditions include, but are not limited to, recession, inflation, interest rates, unemployment levels, gasoline prices, consumer credit availability, consumer credit delinquency and loss rates, personal discretionary spending levels, and consumer sentiment about the economy in general. These conditions and the economy in general could be affected by significant national or international events such as acts of terrorism. When these economic conditions worsen or stagnate, it can have a material adverse effect on consumer demand for vehicles generally, on demand from particular consumer categories or demand for particular vehicle types. It can also negatively impact availability of credit to finance vehicle purchases for all or certain categories of consumers. This could result in lower sales, decreased margins on units sold, and decreased profits for Kaixin’s business. Worsening or stagnating economic conditions can also have a material adverse effect on the supply of premium used vehicles, as automotive manufacturers produce fewer new vehicles and consumers retain their current vehicles for longer periods of time. This could result in increased costs to acquire used vehicle inventory and decreased margins on units sold.

 

Any significant change or deterioration in economic conditions could have a material adverse effect on Kaixin’s business, sales, results of operations and financial condition.

 

Kaixin’s ability to operate and grow its platform depends in substantial part on its ability to access data and other resources that are available from a limited number of third parties.

 

In order to deliver the full functionality offered by Kaixin’s platform, including its Dealer SaaS system which empowers its Dealerships in their operations and connects them to other platform participants, Kaixin needs continued access to sources of used auto market information, much of which is available only from a limited number of databases and other third parties, and other portions of which is made or are publicly available by other sources, including public listings and the public websites or applications of Kaixin’s competitors.

 

Kaixin has developed various processes to obtain data from certain sources of used car market information and other third parties. In certain cases, Kaixin has entered into arrangements with parties who provide it raw market data for use in its systems. The terms of the arrangements under which Kaixin has access to such data vary, which can impact the offering Kaixin is able to deliver. For instance, many agreements have terms that limit Kaixin’s access to and permitted uses of listing, sales or pricing data. In addition, Kaixin relies on tools to gather publicly available information for use in its proprietary data systems.

 

The third parties with whom Kaixin currently contracts for data may, in the future, change their position and limit or eliminate Kaixin’s access to data and resources, increase the costs for access, provide data and resources to it in more limited or less useful formats, or restrict Kaixin’s permitted uses of data and resources. There can also be no assurance that the publicly available data Kaixine collects and utilizes will continue to be available or that the tools Kaixin uses to collect it will continue to be able to gather and format it appropriately or at all. Failure to continue to maintain and expand Kaixin’s access to suitable pricing, listing and other data and resources may adversely impact its ability to continue to serve its Dealerships, other platform participants and expand its offering to new customers.

 

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If Kaixin’s access to the data and resources necessary to support its platform is eliminated, reduced or becomes more costly to it, Kaixin’s ability to compete in the marketplace or to grow its business could be impaired and its operating results would suffer.

 

Kaixin’s business generates and processes a large quantity of data, and improper handling of or unauthorized access to such data may adversely affect its business.

 

Kaixin faces risks related to complying with applicable laws, rules and regulations relating to the collection, use, disclosure and security of personal information, as well as any requests from regulatory and government authorities relating to such data. For instance, Kaixin’s Dealer SaaS system utilizes and generates substantial volumes of data on consumers and dealers, and Kaixin and its Dealerships rely on it for their operations and inventory management. This information includes the information customers provide when purchasing a vehicle and applying for vehicle financing. In the event that Kaixin experienced a failure of its information systems, its operations and financial performance could be materially harmed, and if the information is accessed by third parties or publicized without authorization, its reputation or competitive position could suffer.

 

The PRC regulatory and enforcement regime with regard to data security and data protection has continued to evolve. There are uncertainties on how certain laws and regulations will be implemented in practice. PRC regulators have been increasingly focused on regulating data security and data protection. Kaixin expects that these areas will receive greater attention from regulators, as well as attract public scrutiny and attention going forward. This greater attention, scrutiny and enforcement, including more frequent inspections, could increase Kaixin’s compliance costs and subject it to heightened risks and challenges associated with data security and protection. If Kaixin is unable to manage these risks, its reputation and results of operations could be materially and adversely affected. For further details please see “Regulation — Regulations Relating to Information Security.”

 

Kaixin also grants limited access to specified data on its technology platform to certain other parties, such as its Dealerships. Kaixin’s Dealerships face the same challenges and risks inherent in handling and protecting large volumes of data. Any system failure or security breach or lapse on Kaixin’s part or on the part of any of such third parties that results in the release of user data, or failure to respond thereto, could harm Kaixin’s reputation and brand and, consequently, its business, in addition to exposing it to potential legal liability.

 

In addition, Kaixin may become subject to additional laws in other jurisdictions. The laws, rules and regulations of other jurisdictions, such as the U.S. and Europe, may impose more stringent or conflicting requirements and penalties than those in China, compliance with which could require significant resources and costs. Kaixin’s policies and practices concerning the collection, use and disclosure of user data are posted on its websites. Any failure, or perceived failure, by Kaixin to comply with any regulatory requirements or privacy protection-related laws, rules and regulations could result in proceedings or actions against Kaixin by governmental entities or others. These proceedings or actions could subject Kaixin to significant penalties and negative publicity, require it to change its business practices, increase its costs and severely disrupt its business.

 

Kaixin relies on sophisticated information systems to run its business. The failure of these systems, any service disruptions or outages, or the inability to enhance its capabilities, could have a material adverse effect on its business, sales and results of operations.

 

Kaixin’s business and reputation are dependent upon the performance, reliability, availability, integrity and efficient operation of its information systems. In particular, Kaixin relies on its information systems to manage sales, inventory, its customer-facing websites and applications, including its mobile app, consumer financing and customer information. Kaixin also relies on its big data analytics to review and analyze data from across its platform and assist in its corporate and operational decision-making. There is no assurance that Kaixin will be able to protect its platform and computer systems against, among others, damage or interruption from natural disasters, power or telecommunications failures, air quality issues, environmental conditions, software errors, bugs or defects, configuration errors, computer viruses, denial-of-service attacks, security breaches, hacking attempts or criminal acts at all times. In the event of a service disruption or outage on Kaixin’s platform or in its computer systems, Kaixin’s platform’s ability to operate its Dealer SaaS and facilitate loans and its computer systems’ ability to store, retrieve, process and manage data may be adversely affected. For example, Kaixin may experience temporary service disruptions or data losses during data migrations between old and new systems or system upgrades. Kaixin may not be able to recover all data and services in the event of a service disruption or outage. Additionally, Kaixin’s insurance policies may not adequately compensate it for any losses that it may incur during service disruptions or outages.

 

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Any interruption or delays in Kaixin’s services, whether as a result of third-party error or Kaixin’s error, natural disasters or security breaches, whether accidental or willful, could harm Kaixin’s relationships with its customers and other platform participants and its reputation, subject it to liabilities and cause customers and other platform participants to abandon its platform, any of which could adversely affect Kaixin’s business, financial condition and results of operations.

 

Cyber-attacks, computer viruses, physical or electronic break-ins or other unauthorized access to Kaixin’s or its business partners’ computer systems could result in misuse of confidential information and misappropriation of funds of its customers and other platform participants, subject Kaixin to liabilities, cause reputational harm and adversely impact its results of operations and financial condition.

 

Kaixin’s platform collects, stores and processes certain personal information and other sensitive data from its customers and other platform participants. The massive data that Kaixin has processed and stored makes it and its server hosting service providers the targets of, and potentially vulnerable to, cyber-attacks, computer viruses, hackers, denial-of-service attacks, physical or electronic break-ins or other authorized access. While Kaixin has taken steps to protect such confidential information, its security measures may be breached. Because techniques used to sabotage or obtain unauthorized access into systems change frequently and generally are not recognized until they are launched against a target, Kaixin may be unable to anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access to Kaixin’s or Kaixin’s server hosting service providers’ systems could cause confidential customer information to be stolen and used for criminal purposes. As personally identifiable and other confidential information is subject to legislation and regulations in numerous domestic and international jurisdictions, inability to protect confidential information of Kaixin’s customers and other platform participants could result in additional cost and liability for Kaixin, damage its reputation, inhibit the use of its platform and harm its business. The Administrative Measures for the Security of the International Network of Computer Information Network, issued in December 1997 and amended in January 2011, requires Kaixin to report any data or security breaches to the local offices of the PRC Ministry of Public Security within 24 hours of any such breach. The Cyber Security Law of the PRC, issued in June 2017, requires Kaixin to take immediate remedial measures when it discovers that its products or services are subject to risks, such as security defects or bugs. Such remedial measures include, informing Kaixin’s customers and other platform participants of the specific risks and reporting such risks to the relevant competent departments.

 

Kaixin also faces indirect technology and cybersecurity risks relating to its business partners, including its third-party payment service providers who manage the transfer of customer funds. As a result of increasing consolidation and interdependence of computer systems, a technology failure, cyber-attack or other information or security breach that significantly compromises the systems of one entity could have a material impact on its business partners. Although Kaixin’s agreements with third-party payment service providers provide that each party is responsible for the cybersecurity of its own systems, any cyber-attacks, computer viruses, hackers, denial-of-service attacks, physical or electronic break-ins or similar disruptions of such third-party payment service providers could, among other things, adversely affect Kaixin’s ability to serve its customers and other platform participants, and could even result in misappropriation of funds of its customers and other platform participants. If that were to occur, Kaixin’s third-party payment service providers and Kaixin could be held liable to customers and other platform participants who suffer losses from the misappropriation.

 

Kaixin’s business is sensitive to changes in the prices of used and new vehicles.

 

Any significant changes in retail prices for used and new vehicles could have a material adverse effect on Kaixin’s sales and results of operations, including its gross margin, which was 3.9% in the year ended December 31, 2017 and 4.9% in the six months ended June 30, 2018. For example, if retail prices for used vehicles rise relative to retail prices for new vehicles, it could make buying a new vehicle more attractive to Kaixin’s customers than buying a used vehicle, which could have a material adverse effect on sales and results of operations and could result in a decrease in Kaixin’s gross margin. Manufacturer incentives could contribute to narrowing this price gap. Kaixin’s new car sales would also be affected by changes in the price of new cars, both in terms of consumer sensitivity to prices as well as Kaixin’s margins on such sales.

 

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Kaixin’s business is sensitive to conditions affecting automotive manufacturers, including manufacturer recalls.

 

Adverse conditions affecting one or more automotive manufacturers could have a material adverse effect on Kaixin’s sales and results of operations and could impact the supply of vehicles, including the supply of new and used vehicles. In addition, manufacturer recalls are a common occurrence that have accelerated in frequency and scope in recent years. Because Kaixin does not have manufacturer authorization to complete recall-related repairs, some vehicles it sells may have unrepaired safety defects. Such recalls, and Kaixin’s lack of authorization to make recall-related repairs, could adversely affect used vehicle sales or valuations, could cause it to temporarily remove vehicles from inventory, could force Kaixin to incur increased costs and could expose it to litigation and adverse publicity related to the sale of recalled vehicles, which could have a material adverse effect on its business, sales and results of operations.

 

Kaixin’s business is dependent upon access to vehicle inventory. Obstacles to acquiring inventory, whether because of supply, competition, or other factors, or a failure to expeditiously liquidate that inventory could have a material adverse effect on its business, sales and results of operations.

 

Kaixin’s purchases of used vehicles are based in large part on projected demand, aided by its big data analytics. Kaixin’s average inventory turnover was 65 days in the six months ended June 30, 2018. A reduction in the availability of or access to sources of inventory could have a material adverse effect on Kaixin’s business, sales and results of operations. Although the supply of premium used vehicles has been increasing, there can be no assurance that this trend will continue or that it will benefit Kaixin.

 

As Kaixin’s business is dependent on its appraisal of the value of inventory it purchases, if it fails to adjust appraisal offers to stay in line with broader market trade-in offer trends, or fails to recognize those trends, or if its appraisal process is not accurate, it could adversely affect Kaixin’s ability to acquire inventory. Kaixin’s appraisal process could also be affected by competition, both from used and new car dealers directly and through third-party websites driving appraisal traffic to those dealers. See “— Kaixin operates in a highly competitive industry. Failure to develop and execute strategies to maintain its market position and to adapt to the increasing use of the internet to market, buy, sell and finance used vehicles could adversely affect its business, sales and results of operations” for additional discussion of this risk. Kaixin’s ability to source vehicles from third-party auctions could be affected by an increase in the number of closed auctions that are open only to new car dealers who have franchise relationships with automotive manufacturers. An over-supply of used vehicle inventory will generally cause downward pressure on Kaixin’s product sales prices and margins and increase its average days to sale.

 

Kaixin also sources a portion of its vehicles through its Kaixin Affiliated Network Dealer model, in which it relies on third-party partners, such as individuals or small dealerships, to acquire used cars. Kaixin has historically recognized limited other revenues from consignment sale arrangements with other used car dealers. Kaixin may be unable to maintain relationships with these third parties or may experience issues with the vehicles they provide to it, each of which could harm its business, sales and results of operations.

 

Used vehicle inventory has typically represented a significant portion of total assets. Having such a large portion of Kaixin’s total assets in the form of used vehicle inventory for an extended period of time subjects it to depreciation and other risks that affect its results of operations. Accordingly, if Kaixin has excess inventory or its average days to sale increases, it may be unable to liquidate such inventory at prices that allow it to meet margin targets or to recover its costs could have a material adverse effect on its results of operations.

 

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Changes in international trade policies and international barriers to trade may have an adverse effect on Kaixin’s business and expansion plans.

 

Changes to trade policies, treaties and tariffs in the jurisdictions in which Kaixin operates, or the perception that these changes could occur, could adversely affect the financial and economic conditions in China, Kaixin’s financial condition and results of operations. For example, the U.S. administration under President Donald J. Trump has advocated greater restrictions on trade generally and significant increases in tariffs on goods imported into the United States, particularly from China, and has recently taken other steps toward restricting trade in certain goods. The current U.S. administration has created uncertainty with respect to, among other things, existing and proposed trade agreements (including the renegotiation of NAFTA to better implement U.S. trade policy objectives, including through the potential addition of new provisions to address regulatory practices, state-owned enterprises, services, customs procedures, sanitary measures, labor, the environment, and other matters which may affect Kaixin’s business or the businesses of its customers), free trade generally, and potential significant increases on tariffs on goods imported into the U.S., particularly from Mexico, Canada and China.

 

In addition, China may alter its trade policies, including in response to any new trade policies, treaties and tariffs implemented by the United States or other jurisdictions, which could include restrictions on the import of used vehicles into China. Such policy retaliations could also ultimately result in further trade policy responses by the United States and other countries, and result in an escalation leading to a trade war, which would have an adverse effect on manufacturing levels, trade levels and industries, including automotive sales and other businesses and services that rely on trade, commerce and manufacturing. Any such escalation in trade tensions or a trade war could affect the cost of Kaixin’s inventory, the sales prices of used and new cars or Kaixin’s overall business performance and have a material and adverse effect on its business and results of operations. Chinese policies to relax certain import taxes, such as taxes on used and/or new cars may also impact Kaixin’s business. For instance, if import taxes and similar duties on new cars are reduced, demand for used cars could be harmed and the margins of Kaixin’s used car sales business could be negatively impacted, which could adversely affect Kaixin’s results of operations and financial condition. Increased restrictions on trade or certain other changes to trade policies could have an adverse effect of the PRC economy, Kaixin’s industry, and/or its business and results of operations.

 

Kaixin faces credit risk in connection with outstanding loans made by its floor finance business. Failure to assess and manage Kaixin’s credit risks or a significant deterioration in the credit quality of its floor finance loan portfolio may have a material adverse effect on its business, results of operations and financial condition.

 

Kaixin faces credit risk in connection with its floor finance business. Credit risk is the risk of loss due to adverse changes in a borrower’s ability to meet its financial obligations on agreed-upon terms. The degree of credit risk will vary based on many factors including the size of the loan, the credit characteristics of the borrower, the contractual terms in the loan documents and the availability and quality of collateral. Credit risk management is based on analyzing the creditworthiness of the borrower, the adequacy of underlying collateral given current events and conditions and the existence and strength of any guarantor support. Kaixin has limited experience in designing and operating credit risk control systems, and it may be unable to properly analyze and mitigate the credit risks inherent in its floor finance business.

 

The overall credit quality of Kaixin’s loan portfolio is impacted by factors outside of its control, such as the performance of the Chinese economy. In addition, Kaixin’s credit risk is concentrated heavily in a single small segment of the economy, used car dealerships, which may do poorly even as the overall economy is doing well. Economic trends that negatively affect the Chinese economy as a whole or used car dealerships in particular could result in deterioration in credit quality of Kaixin’s loan portfolio. A deterioration in the credit quality of Kaixin’s remaining loan portfolio may require it to increase its provision of financing receivables, which increases its cost of revenues and decreases its gross profit.

 

Kaixin’s remaining outstanding loans, which amounted to US$13.2 million, net of allowances of US$8.3 million as of June 30, 2018, to used car dealerships through its floor financing business are secured by the used cars which they hold as inventory. However, foreclosing on collateral and attempting to liquidate it would cause Kaixin to incur additional expenses, and the value of the collateral may be impaired by the same economic factors that caused the borrowers to default on their loans, such as reduced demand for used cars. In addition, there is constant turnover in the inventory of Kaixin’s borrowers, and Kaixin must ensure that the quality of the collateral does not deteriorate. Kaixin cannot assure you that the collateral for its loans will be sufficient to significantly mitigate any losses it may suffer from defaulted loans.

 

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Kaixin may from time to time be subject to claims, controversies, lawsuits and legal proceedings, which could have a material adverse effect on its financial condition, results of operations, cash flows and reputation.

 

Kaixin may from time to time become subject to or involved in various claims, controversies, lawsuits, and legal proceedings. Lawsuits and litigation may cause Kaixin to incur defense costs, utilize a significant portion of its resources and divert management’s attention from its day-to-day operations, any of which could harm its business. Any settlements or judgments against Kaixin could have a material adverse impact on its financial condition, results of operations and cash flows. In addition, negative publicity regarding claims or judgments made against Kaixin may damage its reputation and may result in material adverse impact on Kaixin.

 

Kaixin may be unable to prevent others from unauthorized use of its intellectual property, which could harm its business and competitive position.

 

Kaixin regards its trademarks, parents, copyrights, domain names, know how, proprietary technologies and similar intellectual property as critical to its success, and it relies on a combination of intellectual property laws and contractual arrangements, including confidentiality, invention assignment and non-compete agreements with its employees and others to protect its proprietary rights. See also “Kaixin Auto Group’s Business — Intellectual Property.” Despite these measures, any of Kaixin’s intellectual property rights could be challenged, invalidated, circumvented, preempted or misappropriated, or such intellectual property may not be sufficient to provide it with competitive advantages.

 

In March 2018, Renren transferred to Kaixin the kaixin.com domain name, and in May 2018, an affiliate of Renren granted Kaixin an exclusive license to use the “Kaixin” brand. However, trademark registrations in those categories crucial to Kaixin’s business, including automobile sales and maintenance, have not been obtained by such affiliate of Renren. Therefore, Kaixin is unable to prevent any third party from using the Kaixin brand for business that is the same or similar to Kaixin’s. Furthermore, Kaixin is still in the process of obtaining trademark registration for its brand name “开心汽车” which translates to “Kaixin Auto.” As China has adopted a “first-to-file” trademark registration system and there are trademarks similar to Kaixin or its brand which have been registered in those categories that are crucial to its business, Kaixin may not be able to successfully register its brand or may even be exposed to risk of infringement with respect to third party trademark rights. Kaixin believes that its brand is vital to its competitiveness and its ability to attract new customers. Any failure to protect these rights could adversely affect Kaixin’s business and financial condition.

 

Kaixin cannot assure you that the measures it has taken will be sufficient to prevent any misappropriation of its intellectual properties. In addition, because of the rapid pace of technological change in Kaixin’s industry, parts of its business rely on technologies developed or licensed by third parties, and it may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all.

 

It is often difficult to maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to Kaixin for any such breach. Accordingly, Kaixin may not be able to effectively protect its intellectual property rights or to enforce its contractual rights in China. Preventing any unauthorized use of Kaixin’s intellectual property is difficult and costly and the steps it takes may be inadequate to prevent the misappropriation of its intellectual property. In the event that Kaixin resorts to litigation to enforce its intellectual property rights, such litigation could result in substantial costs and a diversion of its managerial and financial resources. Kaixin can provide no assurance that it will prevail in such litigation. In addition, Kaixin’s trade secrets may be leaked or otherwise become available to, or be independently discovered by, its competitors. To the extent that Kaixin’s employees or consultants use intellectual property owned by others in their work for it, disputes may arise as to the rights in related know how and inventions. Any failure in protecting or enforcing Kaixin’s intellectual property rights could have a material adverse effect on its business, financial condition and results of operations.

 

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Kaixin may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt its business and operations.

 

Kaixin cannot be certain that its operations or any aspects of its business does not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. Kaixin may be from time to time, in the future, become subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by Kaixin’s products, services or other aspects of its business without its awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against Kaixin in China, the United States or other jurisdictions. If any third-party infringement claims are brought against Kaixin, it may be forced to divert management’s time and other resources from Kaixin’s business and operations to defend against these claims, regardless of their merits.

 

Additionally, the application and interpretation of China’s intellectual property rights laws and the procedures and standards for granting trademarks, patents, copyrights, know-how or other intellectual property rights in China are still evolving and are uncertain, and Kaixin cannot assure you that PRC courts or regulatory authorities would agree with Kaixin’s analysis or that of its counsel. If Kaixin were found to have violated the intellectual property rights of others, it may be subject to liability for its infringement activities or may be prohibited from using such intellectual property, and it may incur licensing fees or be forced to develop alternatives of its own. As a result, Kaixin’s business and results of operations may be materially and adversely affected.

 

If Kaixin fails to implement and maintain an effective system of internal controls over financial reporting, it may be unable to accurately report its results of operations, meet its reporting obligations or prevent fraud.

 

Kaixin is a subsidiary of a listed company with limited accounting personnel and other resources with which to address its internal controls and procedures. Kaixin’s independent registered public accounting firm has not conducted an audit of Kaixin’s internal control over financial reporting. However, in connection with the audit of Kaixin’s consolidated financial statements as of December 31, 2015, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017, Kaixin identified one “material weakness” in its internal control over financial reporting and other control deficiencies. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified relates to inadequate controls designed over the accounting of significant and complex transactions to ensure that those transactions are properly accounted for in accordance with U.S. GAAP. Following the identification of the material weakness and other control deficiencies, Kaixin has taken measures and plans to continue to take measures to remedy these deficiencies. For details of the material weakness and these remedies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Kaixin Auto Group — Internal Control over Financial Reporting.” However, the implementation of these measures may not fully address the material weakness and deficiencies in Kaixin’s internal control over financial reporting, and it cannot conclude that they have been fully remedied. Kaixin’s failure to correct the material weakness and control deficiencies or its failure to discover and address any other material weakness or control deficiencies could result in inaccuracies in its financial statements and could also impair its ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. As a result, Kaixin’s business, financial condition, results of operations and prospects may be materially and adversely affected.

 

Moreover, ineffective internal control over financial reporting significantly hinders Kaixin’s ability to prevent fraud.

 

In addition, Kaixin has acquired 15 Dealerships since the second half of 2017, for which it has not yet fully evaluated the related internal control over financial reporting. Upon completion of such evaluation, Kaixin might identify additional material weaknesses related to those businesses recently acquired.

 

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Furthermore, it is possible that, had Kaixin’s independent registered public accounting firm conducted an audit of Kaixin’s internal control over financial reporting, such accountant might have identified additional material weaknesses and deficiencies. Upon completion of the Business Combination, Kaixin will become a subsidiary of CM Seven Star, which is subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or Section 404, requires that CM Seven Star include a report from management on the effectiveness of its internal control over financial reporting in its annual report on Form 10-K beginning with its annual report for the fiscal year ending December 31, 2018. In addition, once CM Seven Star ceases to be an “emerging growth company” as such term is defined in the JOBS Act, its independent registered public accounting firm must attest to and report on the effectiveness of its internal control over financial reporting. CM Seven Star’s management may conclude that its internal control over financial reporting is not effective, based all or in part on Kaixin’s internal control over financial reporting. Moreover, even if CM Seven Star’s management concludes that its internal control over financial reporting is effective, its independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with CM Seven Star’s internal controls or the level at which its controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from CM Seven star. In addition, after the completion of the Business Combination, Kaixin’s and/or CM Seven Star’s reporting obligations may place a significant strain on their respective management teams, operational and financial resources and systems for the foreseeable future. CM Seven Star may be unable to timely complete its evaluation testing and any required remediation.

 

During the course of documenting and testing its internal control procedures, in order to satisfy the requirements of Section 404, CM Seven Star may identify other weaknesses and deficiencies in its internal control over financial reporting. In addition, if it fails to maintain the adequacy of its or Kaixin’s internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, it may not be able to conclude on an ongoing basis that it has have effective internal control over financial reporting in accordance with Section 404. If CM Seven Star fails to achieve and maintain an effective internal control environment, it could suffer material misstatements in its financial statements and fail to meet its reporting obligations, which would likely cause investors to lose confidence in its and/or Kaixin’s reported financial information. This could in turn limit its and/or Kaixin’s access to capital markets, harm its results of operations, and lead to a decline in the value of its and/or Kaixin’s ordinary shares. Additionally, ineffective internal control over financial reporting could expose Kaixon or us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we are listed, regulatory investigations and civil or criminal sanctions. Kaixin or we may also be required to restate its or our financial statements from prior periods.

 

Kaixin depends on third parties for supplies of spare parts and accessories.

 

Kaixin depends on auto manufacturers and independent local third-party suppliers for certain spare parts and accessories it sells. The success of such value-added services is dependent on these suppliers’ ability to anticipate changes in consumer tastes, preferences and requirements and deliver to Kaixin in sufficient quantities and on a timely basis a desirable, high-quality and price-competitive mix of accessories. Kaixin’s suppliers’ products may fail to meet Kaixin’s customers’ expectations due to changes of consumer preferences. Kaixin may be unable to maintain a sufficient stock. Kaixin’s suppliers may increase their prices due to increasing demand for their products from Kaixin’s competitors. If Kaixin cannot or opts not to procure spare parts and accessories from such third-party suppliers, its profit margin for after-sales services might be adversely affected. Moreover, the spare parts supplied by Kaixin’s suppliers may fail to function properly and as a result, its customers may make claims against it, in which case it may be required to make repairs or pay damages. In the event of any of the above, Kaixin’s margins of these products may be affected, which in turn could adversely affect its results of operations and financial condition.

 

Kaixin’s business depends on the continued efforts of its senior management. If one or more of Kaixin’s key executives were unable or unwilling to continue in their present positions, Kaixin’s business may be severely disrupted.

 

Kaixin’s business operations depend on the continued services of its senior management, particularly the executive officers named in this proxy statement. While Kaixin has provided different incentives to its management, Kaixin cannot assure you that it can continue to retain their services. If one or more of Kaixin’s key executives were unable or unwilling to continue in their present positions, Kaixin may not be able to replace them easily or at all, its future growth may be constrained, its business may be severely disrupted and its financial condition and results of operations may be materially and adversely affected. Kaixin may incur additional expenses to recruit, train and retain qualified personnel. If any dispute arises between Kaixin’s current or former officers and Kaixin, Kaixin may have to incur substantial costs and expenses in order to enforce such agreements in China or it may be unable to enforce them at all.

 

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Kaixin may not be able to attract and retain the qualified and skilled employees needed to support its business.

 

Kaixin believes its success depends on the efforts, effectiveness and talent of its employees, including automotive engineers, technicians, salespeople and research and development personnel. Kaixin’s future success depends on its continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled personnel is extremely intense. Kaixin may not be able to hire and retain these personnel at compensation levels consistent with its existing compensation and salary structure. Some of the companies with which Kaixin competes for experienced employees have greater resources than Kaixin has and may be able to offer more attractive terms of employment.

 

In addition, Kaixin invests significant time and resources in training its employees, which increases their value to competitors who may seek to recruit them. If Kaixin fails to retain its employees, it could incur significant expenses in hiring and training their replacements, and the quality of Kaixin’s services and its ability to serve its customers could diminish, resulting in a material adverse effect to its business.

 

Increases in labor costs in the PRC may adversely affect Kaixin’s business and results of operations.

 

The economy in China has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue to increase. In addition, Kaixin is required by PRC laws and regulations to pay various statutory employee benefits, including pension, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of Kaixin’s employees. Kaixin expects that its labor costs, including wages and employee benefits, will continue to increase. Unless Kaixin is able to control its labor costs or pass on these increased labor costs to its customers and other platform participants by increasing the fees of its services, Kaixin’s financial condition and results of operations may be adversely affected.

 

Kaixin’s quarterly results may fluctuate significantly partly due to seasonality and may not fully reflect the underlying performance of its business.

 

Kaixin’s quarterly results of operations, including the levels of its revenues, operating cost and expenses, net loss and other key metrics, may vary significantly in the future due to a variety of factors, some of which are outside of Kaixin’s control, and period-to-period comparisons of Kaixin’s operating results may not be meaningful, especially given its limited operating history. Accordingly, the results for any one quarter are not necessarily an indication of future performance. Fluctuations in quarterly results may adversely affect the value of Kaixin’s ordinary shares. Factors that may cause fluctuations in Kaixin’s quarterly financial results include:

 

          its ability to attract new car buyers;

 

          its ability to maintain existing relationships with business partners and establish new relationships with additional business partners, such as financial institutions;

 

          its ability to access capital;

 

          the mix of solutions and services it offers;

 

          the amount and timing of its operating cost and expenses and the maintenance and expansion of its business, operations and infrastructure;

 

          financial institutions’ willingness and ability to fund financing transactions through its platform on reasonable terms;

 

          its emphasis on experience of car buyers, instead of near-term growth;

 

          the timing of expenses related to the development or acquisition of technologies or businesses;

 

          proper and sufficient accounting policies with respect to its risk reserve liabilities and implementation;

 

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          network outages or security breaches;

 

          general economic, industry and market conditions; and

 

          changes in applicable laws and regulations.

 

In addition, Kaixin has experienced, and expects to continue to experience, seasonal fluctuations in its revenues and results of operations. Trends of Kaixin’s revenues are a reflection of car purchase patterns by car buyers. Used car sales tend to be lower in the first quarter of each year than in the other three quarters due to the effect of the Chinese New Year holiday. As a result of these factors, Kaixin’s revenues may vary from quarter to quarter and its quarterly results may not be comparable to the corresponding periods of prior years. Kaixin’s actual results may differ significantly from its targets or estimated quarterly results. Therefore, you may not be able to predict Kaixin’s annual results of operations based on a quarter-to-quarter comparison of its results of operations. The quarterly fluctuations in Kaixin’s revenues and results of operations could result in volatility and cause the price of its shares to fall. As Kaixin’s revenues grow, these seasonal fluctuations may become more pronounced.

 

An occurrence of a natural disaster, widespread health epidemic or other outbreaks could have a material adverse effect on Kaixin’s business, financial condition and results of operations.

 

Kaixin’s business could be materially and adversely affected by natural disasters, such as snowstorms, earthquakes, fires or floods, the outbreak of a widespread health epidemic, such as swine flu, avian influenza, severe acute respiratory syndrome, or SARS, Ebola, Zika or other events, such as wars, acts of terrorism, environmental accidents, power shortage or communication interruptions. The occurrence of a disaster or a prolonged outbreak of an epidemic illness or other adverse public health developments in China or elsewhere in the world could materially disrupt Kaixin’s business and operations. These events could also significantly impact Kaixin’s industry and cause a temporary closure of the Dealerships and other facilities Kaixin uses for its operations, which would severely disrupt its operations and have a material adverse effect on its business, financial condition and results of operations. Kaixin’s operations could be disrupted if any of its employees or employees of its business partners were suspected of having the swine flu, avian influenza, SARS, Ebola, Zika or other disease epidemics, since this could require Kaixin or its business partners to quarantine some or all of these employees or disinfect the facilities used for its operations. In addition, Kaixin’s revenues and profitability could be materially reduced to the extent that a natural disaster, health epidemic or other outbreak harms the global or PRC economy in general. Kaixin’s operations could also be severely disrupted if its customers or other platform participants were affected by natural disasters, health epidemics or other outbreak.

 

Kaixin is subject to local conditions in the geographic areas in which it is concentrated.

 

Kaixin’s performance is subject to local economic, competitive and other conditions prevailing in geographic areas where it operates. Since a large portion of Kaixin’s sales are generated in second- and third-tier cities in China, its results of operations depend substantially on general economic conditions and consumer spending habits in these markets. In the event that any of these geographic areas experience a downturn in economic conditions, it could have a material adverse effect on Kaixin’s business, sales and results of operations.

 

Kaixin’s business could be adversely affected by a weakening market for asset-backed securities.

 

Kaixin has in the past completed two issuances of asset-backed securities, or ABSs on the Shanghai Stock Exchange, which are backed by Kaixin’s finance lease assets. In connection with these issuances, Kaixin subscribed for a subordinated tranche of ABSs in order to provide a guarantee for the prime tranche. If the market for ABSs weakens, Kaixin may also be unable to use ABS or similar offerings, such as asset-backed notes, or wealth management products as a source of financing for its business, which may cause it to need to find other sources of financing. In addition, the market value of Kaixin’s ABSs then outstanding, if any, may decrease, and Kaixin may incur losses on the subordinated tranche which it holds at such time. Further, if the collateralized obligations underlying the ABSs do not generate sufficient funds to cover the ABS obligations, Kaixin may be liable to ABS holders for any shortfall. Kaixin may also be liable to its ABS administrator if it fails to perform its contractual obligations. Further, the inability to securitize Kaixin’s portfolio in the future may hurt its performance and its ability to grow its business.

 

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Negative media coverage could adversely affect our business.

 

Negative publicity about us or our business, shareholders, affiliates, directors, officers or other employees, as well as the industry in which we operate, can harm our operations. Such negative publicity could be related to a variety of matters, including:

 

·alleged misconduct or other improper activities committed by our shareholders, affiliates, directors, officers and other employees;
·false or malicious allegations or rumors about us or our shareholders, affiliates, directors, officers and other employees;
·user complaints about the quality of our products and services;
·copyright infringements involving us and content offered on our platform;
·security breaches of confidential user information; and
·governmental and regulatory investigations or penalties resulting from our failure to comply with applicable laws and regulations.

 

We may also be affected by publicity relating to third party service providers. For example, in September 2018, there was negative publicity involving certain senior officers of iResearch, the industry consultant commissioned to prepare an industry report in connection with this proxy statement. According to a public announcement made by iResearch, certain senior officers of iResearch are cooperating with governmental investigations in China. Such publicity may raise questions as to the integrity of the industry data produced by iResearch.

 

In addition to traditional media, there has been an increasing use of social media platforms and similar devices in China, including instant messaging applications, such as Weixin/WeChat, social media websites and other forms of internet-based communications that provide individuals with access to a broad audience of users and other interested persons. The availability of information on instant messaging applications and social media platforms is virtually immediate as is its impact without affording us an opportunity for redress or correction. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Information concerning our company, shareholders, directors, officers and employees may be posted on such platforms at any time. The risks associated with any such negative publicity or incorrect information cannot be completely eliminated or mitigated and may materially harm our and/or Kaixin’s reputation, business, financial condition and results of operations.

 

Kaixin has limited insurance coverage which could expose it to significant costs and business disruption.

 

The insurance industry in China is still in an early stage of development, and insurance companies in China currently offer limited business-related insurance products. Kaixin does not maintain business interruption insurance or general third-party liability insurance, nor does it maintain property insurance or key-man insurance. Kaixin considers its insurance coverage to be reasonable in light of the nature of its business and the insurance products that are available in China and in line with the practices of other companies in the same industry of similar size in China, but Kaixin cannot assure you that its insurance coverage is sufficient to prevent it from any loss or that it will be able to successfully claim its losses under its current insurance policies on a timely basis, or at all. If Kaixin incurs any loss that is not covered by its insurance policies, or the compensated amount is significantly less than its actual loss, its business, financial condition and results of operations could be materially and adversely affected.

 

Risks Related to Kaixin’s Carve-out from Renren and Kaixin’s Relationship with Renren

 

Kaixin has no experience operating as a stand-alone public company.

 

Kaixin was incorporated in the Cayman Islands as a wholly owned subsidiary of Renren. Kaixin has no experience conducting its operations as a stand-alone public company. Prior to the Business Combination, Renren has provided Kaixin with financial, administrative, sales and marketing, human resources and legal services, and also has provided Kaixin with the services of a number of its executives and employees. After Kaixin becomes a stand-alone public company, it expects Renren to continue to provide it with certain support services, but to the extent Renren does not continue to provide it with such support, it will need to create its own support systems. Kaixin may encounter operational, administrative and strategic difficulties as it adjusts to operating as a stand-alone public company. This may cause Kaixin to react more slowly than its competitors to industry changes and may divert its management’s attention from running its business or otherwise harm its operations.

 

In addition, after Kaixin becomes a public company, its management team will need to develop the expertise necessary to comply with the numerous regulatory and other requirements applicable to public companies, including requirements relating to corporate governance, listing standards and securities and investor relations issues. While Kaixin was a subsidiary of Renren, it was indirectly subject to requirements to maintain an effective internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002. However, as a stand-alone public company, Kaixin’s management will have to evaluate its internal control system independently with new thresholds of materiality, and to implement necessary changes to its internal control system. Kaixin cannot guarantee that it will be able to do so in a timely and effective manner.

 

Kaixin’s ability to operate its business may suffer if it does not quickly and cost-effectively establish its own financial, administrative and other support functions in order to operate as a separate, stand-alone company.

 

Historically, Kaixin has relied on financial, administrative and other resources of Renren to operate its business. As a separate, stand-alone public company, it will need to create its own financial, administrative and other support systems or contract with third parties to replace Renren’s systems as Kaixin transitions during the term of the shared services agreement, as well as the independent internal controls required by the Sarbanes-Oxley Act of 2002. Any failure or significant disruption to Kaixin’s own financial or administrative systems could have an adverse impact on its business operations, such as paying its suppliers and employees, executing foreign currency transactions or performing other administrative services, on a timely basis.

 

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Kaixin’s financial information included in this proxy statement may not be representative of its financial condition and results of operations if it had been operating as a stand-alone company.

 

For all periods presented in Kaixin’s financial statements, its consolidated financial statements include all assets, liabilities, revenues, expenses and cash flows that were directly attributable to its business whether held or incurred by Renren or by Kaixin. Only those assets and liabilities that are specifically identifiable to Kaixin’s business are included in its consolidated balance sheets. With respect to costs of operations of the used auto business and financing business, an allocation of certain costs and expenses of Renren were also included. These allocations were made using a proportional cost allocation method by considering the proportion of revenues, headcounts as well as estimates of time spent on the provision of services attributable to Kaixin. Kaixin made numerous estimates, assumptions and allocations in its historical financial statements because Renren did not account for Kaixin, and Kaixin did not operate as a stand-alone company for any period prior to the completion of the Business Combination. Although Kaixin’s management believes that the assumptions underlying its financial statements and the above allocations are reasonable, its financial statements may not necessarily reflect its results of operations, financial position and cash flows as if it had operated as a stand-alone public company during the periods presented. See “History and Corporate Structure of Kaixin Auto Group – Reorganization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Kaixin Auto Group” and the notes to Kaixin’s consolidated financial statements included elsewhere in this proxy statement for its historical cost allocation. In addition, upon becoming a stand-alone public company, Kaixin will establish its own financial, administrative and other support systems to replace Renren’s systems, the cost of which could be significantly different from cost allocation with Renren for the same services. Therefore, you should not view Kaixin’s historical results as indicators of its future performance.

 

Kaixin may not continue to receive the same level of support from Renren, and if its collaboration with Renren is terminated or curtailed or if it is no longer able to benefit from the synergies of its cooperation with Renren, its business may be adversely affected.

 

Renren is a leading internet social media company in China, and Kaixin’s business has benefited significantly from Renren’s strong market position in China and its expertise in technology and social media-related businesses. In addition, Kaixin has also benefitted from Renren’s financial support in the past.

 

Although Kaixin will enter into a series of agreements with Renren relating to Kaixin’s ongoing business partnership and service arrangements with Renren, there can be no assurance that Kaixin will continue to receive the same level of support from Renren following the completion of the Business Combination. Kaixin’s current customers and platform partners may react negatively to its separation from Renren. To the extent that Kaixin cannot maintain its cooperative relationships with Renren on commercially reasonable terms or at all, it will need to develop relationships with other business partners, which could result in material and adverse effects to its business and results of operations. Kaixin may also need to obtain financing through other means if Renren ceases to provide financial support to it. Kaixin’s inability to maintain a cooperative relationship with Renren could materially and adversely affect its business, growth and prospects.

 

Kaixin’s agreements with Renren may be less favorable to Kaixin than similar agreements negotiated between unaffiliated third parties. In particular, Kaixin’s non-competition agreement with Renren limits the scope of business that Kaixin is allowed to conduct.

 

Upon completion of the Business Combination, Kaixin will enter into a series of agreements with Renren and the terms of such agreements may be less favorable to Kaixin than would be the case if they were negotiated with unaffiliated third parties. In particular, under the non-competition agreement to be entered into with Renren, Kaixin will agree not to compete with Renren in respect of the business it currently conducts, as described in its periodic filings with the Securities and Exchange Commission, or the SEC, other than the used and new consumer automotive business. Such contractual limitations significantly affect Kaixin’s ability to diversify sources of revenues and may materially and adversely impact Kaixin’s business and prospects should the growth of the used and new consumer automotive business in China slow down. In addition, pursuant to the master transaction agreement with Renren, Kaixin will agree to indemnify Renren for liabilities arising from litigation and other contingencies related to its business and assume these liabilities as part of its carve-out from Renren. The allocation of assets and liabilities between Renren and Kaixin may not reflect the allocation that would have been reached by two unaffiliated parties. Moreover, so long as Renren continues to control Kaixin, it may not be able to bring a legal claim against Renren in the event of contractual breach, notwithstanding Kaixin’s contractual rights under the agreements described above and other inter-company agreements entered into from time to time.

 

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Kaixin’s sales, marketing and brand promotion have benefited significantly from its association with Renren. Any negative development in Kaixin’s market position or brand recognition may materially and adversely affect its marketing efforts and the strength of its brand.

 

Kaixin is a subsidiary of Renren and will continue to be an affiliate of Renren after the completion of the Business Combination, as Renren is expected to remain the controlling shareholder of CM Seven Star. Kaixin has benefited significantly from its association with Renren in marketing its brand and platform. For example, Kaixin has benefited from Renren’s strong brand and industry recognition in China, which has provided it credibility and marketing reach. If Renren loses its market position, the effectiveness of Kaixin’s marketing and business development efforts through its association with Renren may be materially and adversely affected. In addition, any negative publicity associated with Renren will likely have an adverse impact on the effectiveness of Kaixin’s marketing, reputation and brand.

 

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Risks Related to Kaixin’s Corporate Structure

 

Kaixin relies on contractual arrangements with its VIEs and their respective shareholders to operate Kaixin’s business, which may not be as effective as direct ownership in providing operational control and otherwise have a material adverse effect as to its business.

 

Kaixin relies on contractual arrangements with its VIEs and their respective shareholders to operate its business. For a description of these contractual arrangements, see “History and Corporate Structure of Kaixin Auto Group — Contractual Arrangements among Renren Auto, the VIEs and the VIEs Shareholders.” These contractual arrangements may not be as effective as direct ownership in providing Kaixin with control over its VIEs. If with Kaixin’s VIEs or their respective shareholders fail to perform their respective obligations under these contractual arrangements of which they are a party, Kaixin’s recourse to the assets held by its VIEs is indirect and it may have to incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies under PRC law.

 

Any failure by Kaixin’s VIEs or their respective shareholders to perform their obligations under Kaixin’s contractual arrangements with them would have a material adverse effect on Kaixin’s business.

 

Kaixin, through its wholly-owned PRC subsidiary, Renren Auto, has entered into a series of contractual arrangements with its VIEs and their respective shareholders. For a description of these contractual arrangements, see “History and Corporate Structure of Kaixin Auto Group — Contractual Arrangements among Renren Auto, the VIEs and the VIEs Shareholders.” If Kaixin’s VIEs or their shareholders fail to perform their respective obligations under these contractual arrangements, Kaixin may incur substantial costs and expend additional resources to enforce such arrangements. Kaixin may also have to rely on legal remedies under PRC laws, including seeking specific performance or injunctive relief, and claiming damages, which it cannot assure you will be effective under PRC laws. For example, if the shareholders of Kaixin’s VIEs were to refuse to transfer their equity interests in the VIEs to Kaixin or its designee when Kaixin exercises the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward Kaixin, then Kaixin may have to take legal actions to compel them to perform their contractual obligations. Further, if Kaixin fails to maintain effective control over its VIEs, its business would be materially and adversely affected.

 

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All the agreements under Kaixin’s contractual arrangements are governed by PRC laws and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the U.S. As a result, uncertainties in the PRC legal system could limit Kaixin’s 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 PRC laws. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC laws, rulings by arbitrators are final and parties cannot appeal arbitration results in court unless such rulings are revoked or determined unenforceable by a competent court. 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 PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event that Kaixin is unable to enforce these contractual arrangements, or if it suffers significant delay or other obstacles in the process of enforcing these contractual arrangements, it may not be able to exert effective control over its VIEs and relevant rights and licenses held by them which Kaixin requires in order to operate its business, and its ability to conduct its business may be negatively affected. See “ — Risks Related to Doing Business in China — Uncertainties with respect to the PRC legal system could adversely affect Kaixin.”

 

The shareholders of Kaixin’s VIEs may have potential conflicts of interest with Kaixin. Kaixin does not have any arrangements in place to address such potential conflicts.

 

Kaixin has designated individuals who are PRC citizens to be nominee shareholders of its VIEs in China. Although the shareholders of Kaixin’s VIEs are contractually obligated to act in good faith and in Kaixin’s best interest, Kaixin cannot assure you that when conflicts of interest arise, any or all of these individuals will act in the best interest of the company. If these individuals were to act in bad faith towards Kaixin, they may breach or cause Kaixin’s VIEs and its subsidiaries to breach or refuse to renew the existing contractual arrangements with Kaixin.

 

Currently, Kaixin does not have arrangements to address potential conflicts of interest the shareholders of its VIEs may encounter, on one hand, and as a beneficial owner of the company, on the other hand. Kaixin, however, could, at all times, exercise its option under the exclusive option agreement to cause them to transfer all of their equity ownership in Kaixin’s VIEs to a PRC entity or individual designated by Kaixin as permitted by the then applicable PRC laws. In addition, if such conflicts of interest arise, Kaixin could also, in the capacity of attorney-in-fact of the then existing shareholders of Kaixin’s VIEs as provided under the power of attorney, directly appoint new directors of its VIEs. Kaixin relies on the shareholders of its VIEs to comply with PRC laws and regulations, which protect contracts and provide that directors and executive officers owe a duty of loyalty to the company and require them to avoid conflicts of interest and not to take advantage of their positions for personal gains, and the laws of the Cayman Islands, which provide that directors have a duty of care and a duty of loyalty to act honestly in good faith with a view to Kaixin’s best interests. However, the legal frameworks of China and the Cayman Islands do not provide guidance on resolving conflicts in the event of a conflict with another corporate governance regime. If Kaixin cannot resolve any conflicts of interest or disputes between Kaixin and the shareholders of the VIEs, it would have to rely on legal proceedings, which could result in disruption of its business and subject it to substantial uncertainty as to the outcome of any such legal proceedings.

 

If the PRC government deems that the contractual arrangements in relation to Kaixin’s VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, Kaixin could be subject to severe penalties or be forced to relinquish its interests in those operations.

 

The PRC government regulates telecommunications-related businesses through strict business licensing requirements and other government regulations. These laws and regulations also include limitations on foreign ownership of PRC companies that engage in telecommunications-related businesses. Specifically, foreign investors are generally not allowed to own more than a 50% equity interest in any PRC company engaging in value-added telecommunications businesses. The primary foreign investor must also have experience and a good track record in providing value-added telecommunications services, or VATS, overseas.

 

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Because Kaixin is an exempted company incorporated in the Cayman Islands, it is classified as a foreign enterprise under PRC laws and regulations, and its wholly foreign-owned enterprises in the PRC are each a foreign invested enterprise, or a FIE. Accordingly, Kaixin’s subsidiaries are not eligible to operate VATS or provide certain other restricted services related to its business in China. Kaixin relied on Qianxiang Changda and one of its subsidiaries to operate Renren Licai, a peer-to-peer financing platform, until the end of 2017 when both the platform and subsidiary were transferred to Renren. Kaixin relies on Shanghai Jieying to operate Kaixin’s used auto sales online platform and app which Kaixin believes will be considered to be VATS by the PRC government. Accordingly, Kaixin relies on contractual arrangements with Qianxiang Changda and Shanghai Jieying, namely Kaixin’s VIEs, and their respective shareholders, to operate Kaixin’s business. Kaixin’s PRC subsidiary Renren Auto has entered into a series of contractual arrangements with Kaixin’s VIEs and their respective shareholders, which enable Kaixin to (i) exercise effective control over VIEs, (ii) receive substantially all of the economic benefits of the VIEs, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in the VIEs when and to the extent permitted by PRC law.

 

As a result of these contractual arrangements, Kaixin has control over and is the primary beneficiary of the VIEs and hence consolidates its financial results as its consolidated affiliated entities under U.S. GAAP. For a description of these contractual arrangements, see “History and Corporate Structure of Kaixin Auto Group — Contractual Arrangements among Renren Auto, the VIEs and the VIEs Shareholders.”

 

Kaixin believes that its corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Kaixin’s PRC legal counsel, TransAsia Lawyers, based on its understanding of the relevant laws and regulations, is of the opinion that each of the contracts among Kaixin’s relevant wholly-owned PRC subsidiary, its VIEs and their respective shareholders are valid, binding and enforceable in accordance with its terms, except that the pledges on Shanghai Jieying’s equity interests would not be deemed validly created until they are registered with the competent administration of industry and commerce. However, Kaixin has been further advised by its PRC legal counsel that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Thus, the PRC government may ultimately take a view contrary to the opinion of Kaixin’s PRC counsel. There can be no assurance that the PRC government authorities, such as the Ministry of Commerce, or MOFCOM or the Ministry of Industry and Information Technology, or the MIIT, or other authorities that regulate the telecommunications industry, would agree that Kaixin’s corporate structure or any of the above contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.

 

If Kaixin’s corporate structure and contractual arrangements are deemed by the MIIT or the MOFCOM or other regulators having competent authority to be illegal, either in whole or in part, Kaixin may lose control of its VIEs and have to modify such structure to comply with regulatory requirements. However, there can be no assurance that Kaixin can achieve this without material disruption to its business. Further, if Kaixin’s corporate structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:

 

          revoking its business and operating licenses;

 

          levying fines on it;

 

          confiscating any of its income that they deem to be obtained through illegal operations;

 

          shutting down its services;

 

          discontinuing or restricting its operations in China;

 

          imposing conditions or requirements with which it may not be able to comply;

 

          requiring it to change its corporate structure and contractual arrangements;

 

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          restricting or prohibiting its use of the proceeds from overseas offerings to finance its VIEs’ business and operations; and

 

          taking other regulatory or enforcement actions that could be harmful to its business.

 

Furthermore, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to Kaixin corporate structure and contractual arrangements. See “ — Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of the draft PRC Foreign Investment Law, and its enactment may materially and adversely affect Kaixin’s business and financial condition.”

 

Occurrence of any of these events could materially and adversely affect Kaixin’s business, financial condition and results of operations. In addition, if the imposition of any of these penalties or requirement to restructure Kaixin’s corporate structure causes it to lose the rights to direct the activities of its VIEs or its right to receive their economic benefits, Kaixin would no longer be able to consolidate the financial results of such VIE in its consolidated financial statements. However, Kaixin does not believe that such actions would result in the liquidation or dissolution of the company, its wholly-owned subsidiary in China or its VIEs or their subsidiaries. See “History and Corporate Structure of Kaixin Auto Group — Contractual Arrangements among Renren Auto, the VIEs and the VIEs Shareholders.”

 

Contractual arrangements in relation to Kaixin’s VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that Kaixin’s VIEs owe additional taxes, which could negatively affect Kaixin’s financial condition and the value of Kaixin’s ordinary shares.

 

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. The PRC Enterprise Income Tax Law requires every enterprise in China to submit its annual enterprise income tax return together with a report on transactions with its related parties to the relevant tax authorities. The tax authorities may impose reasonable adjustments on taxation if they have identified any related party transactions that are inconsistent with arm’s length principles.

 

Kaixin may face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements among Kaixin’s wholly-owned PRC subsidiary, its VIEs and their respective shareholders were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, regulations and rules, and adjust their income 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 Kaixin’s wholly-owned PRC subsidiary or VIEs for PRC tax purposes, which could in turn increase their tax liabilities without reducing their tax expenses. In addition, if Kaixin’s wholly-owned PRC subsidiary requests the shareholders of its VIEs to transfer their equity interests in its VIEs at nominal or no value pursuant to these contractual arrangements, such transfer could be viewed as a gift and subject the relevant subsidiary to PRC income tax. Furthermore, the PRC tax authorities may impose late payment fees and other penalties on Kaixin’s PRC subsidiary and VIEs for adjusted but unpaid taxes according to applicable regulations. Kaixin’s financial position could be materially and adversely affected if the tax liabilities of its PRC subsidiary and VIEs increase, or if they are required to pay late payment fees and other penalties.

 

Kaixin may lose the ability to use and enjoy assets held by its VIEs that are material to the operation of its business if either entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

 

Kaixin’s VIEs hold substantially all of its assets. Under the contractual arrangements, Kaixin’s VIEs may not and their respective shareholders may not cause the VIEs to, in any manner, sell, transfer, mortgage or dispose of the VIEs’ assets or legal or beneficial interests in the business without Kaixin’s prior consent. However, in the event that the shareholders of Kaixin’s VIEs breach these contractual arrangements and voluntarily liquidate its VIEs, or its VIEs declares bankruptcy and all or part of VIEs’ assets become subject to liens or rights of third-party creditors, or are otherwise disposed of without Kaixin’s consent, Kaixin may be unable to continue some or all of its business activities, which could materially and adversely affect its business, financial condition and results of operations. If Kaixin’s VIEs undergo a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering Kaixin’s ability to operate its business, which could materially and adversely affect its business, financial condition and results of operations.

 

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If the custodians or authorized users of Kaixin’s controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities, or misappropriate or misuse these assets, Kaixin’s business and operations may be materially and adversely affected.

 

Under PRC law, legal documents for corporate transactions, including agreements and contracts that Kaixin’s business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant local branch of the State Administration for Industry and Commerce, or the SAIC. Kaixin generally executes legal documents by affixing chops or seals, rather than having the designated legal representatives sign the documents.

 

Kaixin has three major types of chops — corporate chops, contract chops and finance chops. Kaixin uses corporate chops generally for documents to be submitted to government agencies, such as applications for changing business scope, directors or company name, and for legal letters. Kaixin uses contract chops for executing leases and commercial contracts. Kaixin uses finance chops generally for making and collecting payments, including issuing invoices. Use of corporate chops must be approved by both Kaixin’s legal department and administrative department, use of contract chops must be approved by Kaixin’s legal department, and use of finance chops must be approved by Kaixin’s finance department. The chops of Kaixin’s subsidiaries and VIEs are generally held by the relevant entities so that documents can be executed locally.

 

In order to maintain the physical security of Kaixin’s chops, it generally has them stored in secured locations accessible only to the designated key employees of its legal, administrative or finance departments. Kaixin’s designated legal representatives generally do not have access to the chops. Although Kaixin has approval procedures in place and monitors its key employees, including the designated legal representatives of its subsidiaries and VIEs, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that Kaixin’s key employees or designated legal representatives could abuse their authority, for example, by binding its subsidiaries and VIEs with contracts against its interests, as it would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the apparent authority of Kaixin’s chops or signatures of Kaixin’s legal representatives. If any designated legal representative obtains control of the chop in an effort to obtain control over the relevant entity, Kaixin would need to have a shareholder or board resolution to designate a new legal representative and to take legal action to seek the return of the chop, apply for a new chop with the relevant authorities, or otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated legal representatives obtains and misuses or misappropriates Kaixin’s chops and seals or other controlling intangible assets for whatever reason, Kaixin could experience disruption to its normal business operations. Kaixin may have to take corporate or legal action, which could involve significant time and resources to resolve while distracting management from its operations, and its business and operations may be materially and adversely affected.

 

Substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of the draft PRC Foreign Investment Law, and its enactment may materially and adversely affect Kaixin’s business and financial condition.

 

The MOFCOM published a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the major existing laws and regulations governing foreign investment in China. While the MOFCOM solicited comments on this draft, substantial uncertainties exist with respect to the enactment timetable, interpretation and implementation of the proposed legislation and the extent of revision to the currently proposed draft. The draft Foreign Investment Law, if enacted as proposed, may materially impact the entire legal framework regulating foreign investments in China.

 

Among other things, the draft Foreign Investment Law purports to introduce the principle of “actual control” in determining whether a company is considered a foreign invested enterprise, or a FIE. The draft Foreign Investment Law specifically provides that entities established in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity organized in a foreign jurisdiction, but cleared by the MOFCOM as “controlled” by PRC entities and/or citizens, would nonetheless be treated as a PRC domestic entity for investment in the “restriction category” that could appear on any such “negative list.”

 

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Once an entity is determined to be a FIE, and its investment amount exceeds certain thresholds or its business operation falls within a “negative list” purported to be separately issued by the State Council in the future, market entry clearance by the MOFCOM or its local counterparts would be required.

 

The “variable interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including Kaixin, to conduct business in the industries that are currently subject to foreign investment restrictions in China. Under the draft Foreign Investment Law, VIEs that are controlled via contractual arrangements would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors. For any companies with a VIE structure in an industry category that is in the “restriction category” that could appear on any such “negative list,” the existing VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC state owned enterprises or agencies, or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the VIEs will be treated as FIEs, in which case, the existing VIE structures will likely to be scrutinized and subject to foreign investment restrictions and approval from the MOFCOM and other supervising authorities such as MIIT. Any operation in the industry category on the “negative list” without market entry clearance may be considered as illegal.

 

However, there are significant uncertainties as to how the control status of Kaixin’s VIEs would be determined under the enacted version of the Foreign Investment Law. In addition, it is uncertain whether any of the businesses that Kaixin currently operates or plans to operate in the future through its VIEs would be on the to-be-issued “negative list” and therefore be subject to any foreign investment restrictions or prohibitions. If Kaixin’s VIEs were deemed as a FIE under the enacted version of the Foreign Investment Law, and any of the businesses that it operates were in the “restricted” category on the to-be-issued “negative list,” such determination would materially and adversely affect the value of its ordinary shares. Kaixin also faces uncertainties as to whether the enacted version of the Foreign Investment Law and the final “negative list” would mandate further actions, such as MOFCOM market entry clearance, to be completed by companies with existing VIE structure and whether such clearance can be timely obtained, or at all. If Kaixin were not considered as ultimately controlled by PRC domestic investors under the enacted version of the Foreign Investment Law, further actions required to be taken by Kaixin under the enacted Foreign Investment Law may materially and adversely affect Kaixin’s business and financial condition.

 

In addition, Kaixin’s corporate governance practices may be materially impacted and its compliance costs could increase if it were not considered as ultimately controlled by PRC domestic investors under the Foreign Investment Law, if enacted as currently proposed. For instance, the draft Foreign Investment Law as proposed purports to impose stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and investment amendment report that would be required for each investment and alteration of investment specifics, an annual report would be mandatory, and large foreign investors meeting certain criteria would be required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations could potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible could be subject to criminal liabilities.

 

Risks Related to Doing Business in China

 

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on Kaixin’s business and operations.

 

Substantially all of Kaixin’s assets and operations are located in China. Accordingly, Kaixin’s business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally.

 

The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.

 

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While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on Kaixin. For example, Kaixin’s financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity in China, and since 2012, the Chinese economy has slowed down. Any prolonged slowdown in the Chinese economy may reduce the demand for Kaixin’s products and services and materially and adversely affect its business and results of operations.

 

Uncertainties with respect to the PRC legal system could adversely affect Kaixin.

 

The PRC legal system is based on written statutes and prior court decisions have limited value as precedents. Since these laws and regulations are relatively new and the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involves uncertainties.

 

In 1979, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past four decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, the interpretation and enforcement of these laws and regulations involve uncertainties. Since PRC administrative and court authorities have significant discretion in interpreting, implementing and enforcing statutory provisions and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection Kaixin enjoys than some more-developed legal systems. These uncertainties may affect Kaixin’s decisions on the policies and actions to be taken to comply with PRC laws and regulations, and may affect its ability to enforce its 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 Kaixin.

 

Furthermore, the PRC legal system is 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 a retroactive effect. As a result, Kaixin may not be aware of its violation of any of these policies and rules until sometime after the violation. In addition, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.

 

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against Kaixin or its management named in this proxy statement based on foreign laws.

 

Kaixin is a company incorporated under the laws of the Cayman Islands, it conducts all of its operations in China and all of its assets are located in China. In addition, all of Kaixin’s senior executive officers reside within China for a significant portion of the time and most of its directors and senior executive officers are PRC nationals. As a result, it may be difficult for you to effect service of process upon Kaixin or those persons inside mainland China. In addition, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.

 

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Kaixin may rely on dividends and other distributions on equity paid by its PRC subsidiaries to fund any cash and financing requirements it may have, and any limitation on the ability of its PRC subsidiaries to make payments to Kaixin could have a material and adverse effect on its ability to conduct its business.

 

Kaixin is a Cayman Islands holding company, and it relies on dividends and other distributions on equity paid by its PRC subsidiaries for its cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to its shareholders and repay any debt it may incur. Kaixin’s PRC subsidiaries’ ability to distribute dividends is based upon its distributable earnings. Current PRC regulations permit Kaixin’s PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of Kaixin’s PRC subsidiaries, as a wholly foreign-owned enterprise in China, is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until the aggregate amount of such reserve reaches 50% of its registered capital. At its discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. If Kaixin’s PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may also restrict their ability to pay dividends or make other payments to Kaixin. Any limitation on the ability of Kaixin’s PRC subsidiaries to distribute dividends or other payments to their respective shareholders could materially and adversely limit Kaixin’s ability to grow, make investments or acquisitions that could be beneficial to its businesses, pay dividends or otherwise fund and conduct its business.

 

In addition, the PRC tax authorities may require Kaixin’s PRC subsidiary that entered into contractual arrangement with Kaixin’s PRC VIEs to adjust its taxable income under the VIE arrangements it currently has in place with Kaixin’s VIEs and their respective shareholders in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us. See “ — Risks Related to Kaixin’s Corporate Structure — Contractual arrangements in relation to Kaixin’s VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that Kaixin’s VIEs owe additional taxes, which could negatively affect Kaixin’s financial condition and the value of Kaixin’s ordinary shares.”

 

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent Kaixin from using offshore funds to make loans or additional capital contributions to its PRC subsidiaries, which could materially and adversely affect its liquidity and its ability to fund and expand its business.

 

Kaixin is an offshore holding company primarily conducting its operations in China. Any funds Kaixin transfers to its PRC subsidiaries, either as a shareholder loan or as an increase in registered capital, are subject to registration or filing with relevant governmental authorities in China.

 

According to the relevant PRC regulations on foreign-invested enterprises, or FIEs, in China, capital contributions to Kaixin’s PRC subsidiaries are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, or FICMIS, and registration with other government authorities in China. Any loans to Kaixin’s PRC subsidiaries, which are treated as foreign-invested enterprises, or FIEs under PRC law, are subject to PRC regulations and foreign exchange loan registrations. For example, (a) any foreign loan procured by Kaixin’s PRC subsidiaries is required to be registered with the State Administration of Foreign Exchange, or SAFE, or its local branches, and (b) Kaixin’s PRC subsidiaries may not procure loans which exceed either the cross-border financing risk weighted balance calculated based on a special formula or the difference between their respective registered capital and their respective total investment amount as approved by, or filed with, the MOFCOM or its local branches. Any medium- or long-term loan to be provided by Kaixin to its PRC subsidiaries must be filed and registered with the National Development and Reform Committee and the SAFE or their local branches. See “Regulations — Regulations on Foreign Exchange — Regulations on Offshore Investment by PRC Residents.” Kaixin may not obtain these government approvals or complete such filings or registrations on a timely basis, if at all, with respect to future capital contributions or foreign loans by Kaixin to its PRC subsidiaries. If Kaixin fails to receive such approvals or complete such registration, its ability to use offshore funds and to capitalize its PRC operations may be negatively affected, which could adversely affect its liquidity and its ability to fund and expand its business.

 

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On March 30, 2015, the SAFE promulgated the Circular on Reforming the Management Approach Regarding the Foreign Exchange Capital Settlement of Foreign-Invested Enterprises, or SAFE Circular 19. SAFE Circular 19 took effect as of June 1, 2015. SAFE Circular 19 launched a nationwide reform of the administration of the settlement of the foreign exchange capitals of FIEs and allows FIEs to settle their foreign exchange capital at their discretion, but continues to prohibit FIEs from using the Renminbi fund converted from their foreign exchange capitals for expenditure beyond their business scopes, providing entrusted loans or repaying loans between nonfinancial enterprises. On June 9, 2016, the SAFE promulgated the Circular on Reforming and Standardizing the Administrative Provisions on Capital Account Foreign Exchange, or SAFE Circular 16. SAFE Circular 16 reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of an FIE to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises. Violations of these Circulars could result in severe monetary or other penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit Kaixin’s ability to use Renminbi converted from offshore funds to fund the establishment of new entities in China by Kaixin’s VIEs, to invest in or acquire any other PRC companies through its PRC subsidiaries or to establish new consolidated variable interest entities in the PRC, which may adversely affect its business, financial condition and results of operations.

 

Kaixin is required to obtain certain licenses and permits for its business operations, and it may not be able to obtain or maintain such licenses or permits.

 

The PRC government regulates the Internet and automotive industries extensively, including through licensing and permit requirements pertaining to companies in these industries. Relevant laws and regulations are relatively new and evolving, and their interpretation and enforcement involve significant uncertainty. As a result, under certain circumstances, it may be difficult to determine what actions or omissions may be deemed violations of applicable laws and regulations.

 

Kaixin provides value-added telecommunications services through Shanghai Jieying, which possesses an ICP License. Kaixin is completing the rollout of its service centers. A company engaging in motor vehicle maintenance must apply to the relevant local road transportation authority to obtain a road transportation operation permit after it has become duly registered. Kaixin’s Suzhou Dealership is in the process of obtaining a road transportation operation permit. Failure to obtain, maintain or renew these licenses may significantly disrupt Kaixin’s business, subject it to sanctions, or have other material adverse effects on it.

 

To enable Kaixin’s customers to receive vehicles purchased from its Dealerships and other in-network dealers, it relies initially on the use of its own capital during the waiting period between customers and its financing partners. As Kaixin’s financing partners generally approve and release funds within a period of up to a few weeks to its Dealership or the other in-network dealer, it first releases funds in advance to its Dealership or the relevant in-network dealership so that it can in turn release vehicles to its customers earlier than would otherwise be the case. As the vehicle purchase loan relationship is ultimately between the relevant customers and Kaixin’s financing partners, Kaixin does not consider its service as constituting a financial service requiring it to obtain any approval or license. However, Kaixin cannot assure you that relevant PRC government agencies, would reach the same conclusion as Kaixin. As of the date of this proxy statement, Kaixin has not been subject to any fines or other penalties under any PRC laws or regulations related to the foregoing solutions it provides. However, given the evolving regulatory environment of the financial industry, Kaixin cannot assure you that it will not be required in the future by relevant governmental authorities to obtain approval or license to continue to provide such interim financing solutions used to speed up the vehicle purchase procedure.

 

In addition, pursuant to relevant laws and regulations, as Jieying and Kaixin’s Dealerships are regarded as operators of used car sales business, these entities are required to complete filing with MOFCOM at provincial level. Kaixin may fail to complete such filings in certain locations since the relevant authorities in those areas do not accept such filing application in practice due to the lack of local implementation rules and policies in such respects. Kaixin plans to submit its application as soon as the relevant governmental authorities are ready to accept its filing application. However, Kaixin cannot assure you that it can successfully complete the filing in a timely manner, or at all. Failure to comply with the filing requirements may subject Kaixin’s business to restriction. As a result, Kaixin’s business and results of operations may be materially and adversely affected.

 

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It is required by PRC laws and regulations for companies responsible for the construction projects to prepare environmental impact report, environmental impact statement, or environmental impact registration form based on the different level of potential environmental impact of the projects. The environmental impact reports (required if potentially serious environmental impact) and the environmental impact statements (required if potentially mild environmental impact) are subject to review and approval by the governmental authority and failure to satisfy such requirements may subject one to discontinuation of the construction projects, fines of 1% to 5% of the total investment in the projects or an order of restoration. The environmental impact registration forms (required if very little environmental impact where environmental impact assessment is not necessary) are required to be filed with competent authority and failure to satisfy such requirement may subject one to fines up to RMB50,000 (US$7,971). Kaixin does not regularly conduct construction projects in the ordinary course of its business. However, some of Kaixin’s projects, including the building and overall decoration of its after- sales service centers, could be recognized as construction projects where a timely filing or submission for approval is required and failure to do so may subject Kaixin to fines and other enforcement actions as mentioned above.

 

Considerable uncertainty exists regarding the interpretation and implementation of existing and future laws and regulations governing Kaixin’s business activities. If Kaixin fails to complete, obtain or maintain any of the required licenses or approvals or make necessary filings, it may be subject to various penalties, such as confiscation of illegal gains, imposition of fines and discontinuation or restriction of its operations. Any such penalties may disrupt its business operations and adversely affect its business, financial condition and operations.

 

Kaixin may have exposure to greater than anticipated tax liabilities.

 

Kaixin is subject to enterprise income tax, value-added tax, and other taxes in each province and city in China where it has operations. Kaixin’s tax structure is subject to review by various local tax authorities. The determination of Kaixin’s provision for income tax and other tax liabilities requires significant judgment. In the ordinary course of Kaixin’s business, there are many transactions and calculations where the ultimate tax determination is uncertain. For example, all Kaixin’s used car transactions are structured as between individuals, Kaixin’s managers or employees of its Dealership and consumers, instead of between its domestic companies and consumers, to optimize taxation on its domestic companies or its Dealerships. Although Kaixin believes its estimates are reasonable, the ultimate decisions by the relevant tax authorities may differ from the amounts recorded in its financial statements and may materially affect its financial results in the period or periods for which such determinations are made.

 

Restoration of limits on cross-regional flows of used cars would adversely affect Kaixin’s sourcing and sales of used cars

 

To create a freely circulating market of used cars, the Chinese central government has implemented multiple policies in recent years aimed at removing restrictions on cross-regional flow of used cars. In March 2016, the China State Council issued guidance to promote more convenient transactions of used vehicles. This required the removal, in all cities other than key regions for air pollution prevention and control, such as Beijing and 14 others, of curbs previously implemented to prevent vehicles from one city or province being sold in another, provided that the subject vehicle meets the emission standards of the destination locality. In December 2016, the Ministry of Commerce and the Ministry of Environmental Protection issued orders to implement the State Council’s guideline, required that as long as the regular inspections for environmental protection and motor vehicle safety are valid, and that the motor vehicle meets the emission standards of the destination locality, local governments should not set any other limits. Further, the Government Work Report 2018 states that more efforts will be made this year to scrap any limits on cross-region flow of used cars. Kaixin does not expect that any new restrictions will be imposed to prevent cross-region used car transactions, however, if such restrictions were to be imposed by local governments, it would adversely affect Kaixin’s sourcing and sales of used cars.

 

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Government policies on automobile purchases and ownership may materially affect Kaixin’s results of operations.

 

Government policies on automobile purchases and ownership may have a material effect on Kaixin’s business due to their influence on consumer behaviors. In an effort to alleviate traffic congestion and improve air quality, some local governmental authorities issued regulations and relevant implementation rules in order to control urban traffic and the number of automobiles within particular urban areas. For example, local Beijing governmental authorities adopted regulations and relevant implementing rules in December 2010 to limit the total number of license plates issued to new automobile purchases in Beijing each year. Local Guangzhou governmental authorities also announced similar regulations, which came into effect in July 2013. There are similar policies that restrict the issuance of new automobile license plates in Shanghai, Tianjin, Hangzhou, Guiyang and Shenzhen. In September 2013, the State Council released a plan for the prevention and remediation of air pollution, which requires large cities, such as Beijing, Shanghai and Guangzhou, to further restrict the number of motor vehicles. In October 2013, the Beijing government issued an additional regulation to limit the total number of vehicles in Beijing to no more than six million by the end of 2017. Such regulatory developments, as well as other uncertainties, may adversely affect the growth prospects of China’s automotive industry, which in turn may have a material adverse impact on Kaixin’s business.

 

Kaixin relies on contractual obligations rather than government filings to ensure its continued title to vehicles managed under its inventory financing business.

 

Kaixin’s loans to used car dealerships are structured on a finance lease basis, whereby the entity lessor sells Kaixin the vehicle before leasing it back from Kaixin, although for accounting purposes the transaction is not treated as a sale as it is not substantively a sale due to the economic substance of the transaction. In spite of this arrangement, upon completing the purchase of the subject vehicle, Kaixin does not formally transfer the registration of the vehicle into Kaixin’s name. Kaixin also does not file mortgage registrations relating to the lease of the vehicle. Instead, Kaixin’s contract with the lessor obligates them not to take any action that could undermine Kaixin’s title to the vehicle. In addition, Kaixin retains in its control all documents relating to the vehicle and title, and provide markings for the vehicle identifying it as owned by Kaixin. However, these steps would not prevent a good-faith third-party buyer from taking legal title to the vehicle if the lessor attempted to sell the vehicle without Kaixin’s knowledge. In such event, Kaixin would face costs attempting to recover from the lessor its losses from the unauthorized sale of the vehicle, and Kaixin could be unsuccessful in recovering any such costs.

 

Fluctuations in exchange rates could have a material and adverse effect on Kaixin’s results of operations and the value of Kaixin’s ordinary shares.

 

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions in China and by China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. On November 30, 2015, the Executive Board of the International Monetary Fund completed the regular five-year review of the basket of currencies that make up the Special Drawing Right, or the SDR, and decided that with effect from October 1, 2016, Renminbi is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In the fourth quarter of 2016, the Renminbi has depreciated significantly in the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress toward interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system, and Kaixin cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.

 

Kaixin’s revenues and costs are mostly denominated in RMB. Significant revaluation of the Renminbi may have a material and adverse effect on the value of Kaixin’s ordinary shares. For example, to the extent that Kaixin needs to convert U.S. dollars into Renminbi for its operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount Kaixin would receive from the conversion. Conversely, if Kaixin decides to convert its Renminbi into U.S. dollars for the purpose of making payments for dividends on its Class A ordinary shares or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to it. In addition, appreciation or depreciation in the value of the Renminbi relative to U.S. dollars would affect Kaixin’s financial results reported in U.S. dollar terms regardless of any underlying change in its business or results of operations.

 

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Very limited hedging options are available in China to reduce its exposure to exchange rate fluctuations. To date, Kaixin has not entered into any hedging transactions in an effort to reduce its exposure to foreign currency exchange risk. While Kaixin may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited, and it may not be able to adequately hedge its exposure, or at all. In addition, Kaixin’s currency exchange losses may be magnified by PRC exchange control regulations that restrict its ability to convert Renminbi into foreign currency.

 

Governmental control of currency conversion may limit its ability to utilize its revenues effectively and affect the value of Kaixin’s ordinary shares.

 

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. Kaixin receives all of its revenues in Renminbi. Under Kaixin’s current corporate structure, its Cayman Islands holding company primarily relies on dividend payments from its PRC subsidiaries to fund any cash and financing requirements it may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of Kaixin’s PRC subsidiaries in China may be used to pay dividends to the company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, Kaixin needs to obtain SAFE approval to use cash generated from the operations of its PRC subsidiaries and VIEs to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.

 

In light of the substantial capital outflows of China in 2016 due to the weakening RMB, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement. More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. The PRC government may at its discretion further restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents Kaixin from obtaining sufficient foreign currencies to satisfy its foreign currency demands, it may not be able to pay dividends in foreign currencies to its shareholders.

 

The approval of the China Securities Regulatory Commission may be required in connection with the Business Combination under PRC law.

 

The M&A Rules, which were adopted in 2006 by six PRC regulatory agencies, including the China Securities Regulatory Commission, or the CSRC, purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and the Business Combination may ultimately require approval from the CSRC. If CSRC approval is required, it is uncertain whether it would be possible for Kaixin to obtain the approval and any failure to obtain or delay in obtaining CSRC approval for the Business Combination would subject it to sanctions imposed by the CSRC and other PRC regulatory agencies.

 

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Kaixin’s PRC counsel has advised it that, based on its understanding of the current PRC laws and regulations, it will not be required to submit an application to the CSRC for the approval of the Business Combination because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether transactions like that under this proxy statement are subject to this regulation, (ii) Kaixin’s wholly owned PRC subsidiaries were established by foreign direct investment, rather than through a merger or acquisition of a domestic company as defined under the M&A Rules and (iii) no explicit provision in the M&A Rules classifies the respective contractual arrangements among Kaixin’s PRC subsidiaries, the consolidated affiliated entities and their shareholders as a type of acquisition transaction falling under the M&A Rules.

 

However, Kaixin cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as its PRC counsel, and hence it may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. These regulatory agencies may impose fines and penalties on Kaixin’s operations in China, limit its ability to pay dividends outside of China, limit its operating privileges in China or take other actions that could have a material adverse effect on its business, financial condition, results of operations and prospects, as well as the trading price of the ordinary shares. The CSRC or other PRC regulatory agencies also may take actions requiring Kaixin, or making it advisable for it, to halt this Business Combination. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that Kaixin obtain their approvals for the Business Combination, it may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the value of Kaixin’s ordinary shares.

 

Certain PRC regulations may make it more difficult for Kaixin to pursue growth through acquisitions.

 

The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor acquires control of a PRC domestic enterprise, if (i) any important industry is concerned, (ii) such transaction involves factors that impact or may impact national economic security, or (iii) such transaction will lead to a change in control of a domestic enterprise which holds a famous trademark or PRC time-honored brand. Moreover, the Anti-Monopoly Law promulgated by the Standing Committee of the NPC that became effective in 2008 requires that transactions that are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the MOFCOM before they can be completed. In addition, PRC national security review rules, i.e., Provisions of MOFCOM on Implementation of Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, that became effective in September 2011, and Notice of the General Office of the State Council on Establishment of Security Review System pertaining to Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective in March 2011, require acquisitions by foreign investors of PRC companies engaged in military-related or certain other industries that are crucial to national security be subject to security review before consummation of any such acquisition. In the future, Kaixin may grow its business by acquiring complementary businesses. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from the MOFCOM, may delay or inhibit Kaixin’s ability to complete such transactions, which could affect its ability to expand its business or maintain its market share.

 

Any failure by Kaixin to make full contributions to various employee benefits plans as required by PRC laws may expose it to potential penalties.

 

Companies operating in China are required to participate in various government sponsored employee benefit plans, including certain social insurance schemes and housing funds, and contribute to the plans in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees up to a maximum amount specified by the local governments from time to time at locations where they operate businesses. The requirement of employee benefit plans has not been implemented consistently by the local governments in China given the different levels of economic development in different locations. Kaixin did not pay, or was not able to pay, certain past social security and housing fund contributions in strict compliance with the relevant PRC regulations for and on behalf of its employees due to differences in local regulations and inconsistent implementation or interpretation by local authorities in the PRC. For example, Kaixin engages third party agents to make contributions for its employees in some cities and failure to make such contributions directly exposes Kaixin to penalties by the local authorities. Kaixin will also incur additional costs for any alternative arrangement if it were asked to terminate any existing arrangements with the third party agents.

 

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PRC regulations relating to offshore investment activities by PRC residents may limit the ability of Kaixin’s PRC subsidiaries to increase their registered capital or distribute profits to Kaixin or otherwise expose Kaixin or its PRC resident beneficial owners to liability and penalties under PRC laws.

 

In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 further requires amendment to the SAFE registrations in the event of any changes with respect to the basic information of the offshore special purpose vehicle, such as change of a PRC individual shareholder, name and operation term, or any significant changes with respect to the offshore special purpose vehicle, such as increase or decrease of capital contribution, share transfer or exchange, or mergers or divisions. SAFE Circular 37 is applicable to Kaixin’s shareholders who are PRC residents and may be applicable to any offshore acquisitions that it makes in the future.

 

If Kaixin’s shareholders who are PRC residents fail to make the required registration or to update the previously filed registration, its PRC subsidiaries may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to us, and Kaixin may also be prohibited from making additional capital contributions into its PRC Subsidiaries. On February 13, 2015, the SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under the SAFE Circular 37, will be filed with qualified banks instead of the SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of the SAFE.

 

Kaixin has requested that all of its current shareholders and/or beneficial owners disclose whether they or their shareholders or beneficial owners fall within the ambit of Circular 37 and have urged relevant shareholders and beneficial owners, upon learning they are PRC residents, to register with the local SAFE branch as required under Circular 37. There can be no assurance, however, that all of these individuals may continue to make required filings or updates on a timely manner, or at all. As Kaixin is a subsidiary of a listed company, there can be no assurance that it is or will in the future continue to be informed of identities of all PRC residents holding direct or indirect interest in it. Any failure or inability by such individuals to comply with the SAFE regulations may subject Kaixin to fines or legal sanctions, such as restrictions on cross-border investment activities or its PRC subsidiaries’ ability to distribute dividends to, or obtain foreign exchange-denominated loans from, Kaixin or prevent it from making distributions or paying dividends. As a result, Kaixin’s business operations and its ability to make distributions to shareholders could be materially and adversely affected.

 

In August 2014, MOFCOM promulgated the Measures for the Administration of Overseas Investment, and the National Development Reform Committee, or the NDRC, promulgated the Administrative Measures for the Approval and Filing of Overseas Investment Projects. In December 2017, the NDRC further promulgated the Administrative Measures of Overseas Investment of Enterprises, which became effective in March 2018. Pursuant to these regulations, any outbound investment of PRC enterprises in the area and industry that is not sensitive is required to be filed with MOFCOM and the NDRC or their local branches.

 

Qianxiang Changda, one of Kaixin’s subsidiaries, wholly owns the equity of Fenqi Winday Company Limited (Hong Kong), a company established under the Hong Kong law. Qianxiang Changda has not completed the filing with MOFCOM or the NDRC as of the date of this proxy statement. Any failure or inability by enterprises to comply with SAFE and outbound investment related regulations may subject the responsible officers of such enterprises to fines or legal sanctions, and may result in adverse impact on Kaixin, such as restrictions on the ability to contribute capital and receive dividends.

 

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Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or Kaixin to fines and other legal or administrative sanctions.

 

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. Kaixin and its directors, executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options will be subject to these regulations when it becomes an overseas-listed company upon the completion of the Business Combination. Failure to complete the SAFE registrations may subject them to fines and legal sanctions, and may also limit Kaixin’s ability to contribute additional capital into its PRC subsidiaries and limit its PRC subsidiaries’ ability to distribute dividends to it. Kaixin also faces regulatory uncertainties that could restrict its ability to adopt additional incentive plans for its directors, executive officers and employees under PRC law. See “Regulation — Regulations on Foreign Exchange — Regulations on Employee Stock Options Plans.”

 

In addition, the State Administration of Taxation, or the SAT, has issued certain circulars concerning employee share options and restricted shares. Under these circulars, Kaixin’s employees working in China who exercise share options or are granted restricted shares will be subject to PRC individual income tax. Kaixin’s PRC subsidiaries have obligations to file documents related to employee share options or restricted shares with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If Kaixin’s employees fail to pay or it fails to withhold their income taxes according to relevant laws and regulations, it may face sanctions imposed by the tax authorities or other PRC government authorities. See “Regulations — Regulations on Foreign Exchange — Regulations on Employee Stock Options Plans.”

 

If Kaixin is classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to it and its non-PRC shareholders.

 

Under the Enterprise Income Tax Law and its implementation rules, enterprises that are registered in countries or regions outside the PRC but have their “de facto management bodies” located within China may be considered as PRC resident enterprises and are therefore subject to PRC enterprise income tax at the rate of 25% on their worldwide income. For detailed discussions of applicable laws, regulations and implementation rules, see “Regulation — Regulations on Taxation — Enterprise Income Tax”

 

Kaixin believes that none of its entities outside China is a PRC resident enterprise for PRC tax purposes. See “Regulation — Regulations on Taxation — Enterprise Income Tax.” However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities, and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that Kaixin or any of its subsidiaries outside of China is a PRC resident enterprise for enterprise income tax purposes, then it or any such subsidiaries could be subject to PRC tax at a rate of 25% on worldwide income, which could materially reduce Kaixin’s net income. In addition, Kaixin would also be subject to PRC enterprise income tax reporting obligations. Furthermore, if the PRC tax authorities determine that Kaixin is a PRC resident enterprise for enterprise income tax purposes, gains realized on the sale or other disposition of its ordinary shares and dividends distributed to its non-PRC shareholders may be subject to PRC withholding tax, at a rate of 10% in the case of non-PRC enterprises or 20% in the case of non-PRC individuals (in each case, subject to the provisions of any applicable tax treaty), if such gains are deemed to be from PRC sources. Any such tax may reduce the value of Kaixin’s ordinary shares.

 

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Kaixin faces uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies, and heightened scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions that Kaixin may pursue in the future.

 

The SAT has issued several rules and notices to tighten the scrutiny over acquisition transactions in recent years, including the Notice on Certain Corporate Income Tax Matters Related to Indirect Transfer of Properties by Non-PRC Resident Enterprises issued in February 2015 and amended in 2017, or SAT Circular 7, and the Announcement on Issues Relating to Withholding at Source of Income Tax of Non-resident Enterprises, or SAT Circular 37. Pursuant to these rules and notices, except for a few circumstances falling into the scope of the safe harbor provided by SAT Circular 7, such as open market trading of stocks in public companies listed overseas, if a non-PRC resident enterprise indirectly transfers PRC taxable properties (i.e. properties of an establishment or a place in the PRC, real estate properties in the PRC or equity investments in a PRC tax resident enterprise) by disposing of equity interests or other similar rights in an overseas holding company, without a reasonable commercial purpose and resulting in the avoidance of PRC enterprise income tax, such indirect transfer should be deemed as a direct transfer of PRC taxable properties and gains derived from such indirect transfer may be subject to the PRC withholding tax at a rate of up to 10%. SAT Circular 7 sets out several factors to be taken into consideration by tax authorities in determining whether an indirect transfer has a reasonable commercial purpose, such as whether the main value of equity interests in an overseas holding company is derived directly or indirectly from PRC taxable properties. An indirect transfer satisfying all the following criteria will be deemed to lack reasonable commercial purpose and be taxable under PRC law without considering other factors set out by SAT Circular 7: (i) 75% or more of the equity value of the intermediary enterprise being transferred is derived directly or indirectly from the PRC taxable properties; (ii) at any time during the one-year period before the indirect transfer, 90% or more of the asset value of the intermediary enterprise (excluding cash) is comprised directly or indirectly of investments in the PRC, or 90% or more of its income is derived directly or indirectly from the PRC; (iii) the functions performed and risks assumed by the intermediary enterprise and any of its subsidiaries that directly or indirectly hold the PRC taxable properties are limited and are insufficient to prove their economic substance; and (iv) the foreign tax payable on the gain derived from the indirect transfer of the PRC taxable properties is lower than the potential PRC income tax on the direct transfer of such assets. Each of the foreign transferor and the transferee, and the PRC tax resident enterprise whose equity interests are being transferred may voluntarily report the transfer by submitting the documents required in SAT Circular 7.

 

Although SAT Circular 7 provides clarity in many important areas, such as reasonable commercial purpose, there are still uncertainties on the tax reporting and payment obligations with respect to future private equity financing transactions, share exchange or other transactions involving the transfer of shares in non-PRC resident companies. The PRC tax authorities have discretion under SAT Circular 7 to make adjustments to the taxable capital gains based on the difference between the fair value of the equity interests transferred and the cost of investments. Kaixin may pursue acquisitions in the future that may involve complex corporate structures. If Kaixin is considered a non-PRC resident enterprise under the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of these transactions under SAT Circular 7, Kaixin’s income tax expenses associated with such potential acquisitions will increase, which may adversely affect its financial condition and results of operations.

 

SAT Circular 37 took effect on December 1, 2017. SAT Circular 37 purports to clarify certain issues in the implementation of the above regime, by providing, among other things, the definition of equity transfer income and tax basis, the foreign exchange rate to be used in the calculation of withholding amount, and the date of occurrence of the withholding obligation.

 

Kaixin has conducted and may conduct acquisitions or restructurings that may be governed by the aforesaid tax regulations, as well as the Business Combination and any possible future acquisition of us. There can be no assurance that the PRC tax authorities will not, at their discretion, impose tax return filing obligations on Kaixin or its subsidiaries, require Kaixin or its subsidiaries to provide assistance to an investigation by PRC tax authorities with respect to these transactions or adjust any capital gains. Any PRC tax imposed on a transfer of Kaixin’s shares or equity interests in its PRC subsidiaries, or any adjustment of such gains, would cause Kaixin to incur additional costs and may have a negative impact on its results of operations.

 

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Kaixin faces certain risks relating to the real properties that it leases.

 

Kaixin leases offices and showroom and warehouse space from third parties for its operations in China. Any defects in lessors’ title to the leased properties may disrupt the use of its offices, showrooms or warehouse, which may in turn adversely affect its business operations. For example, certain buildings and the underlying land are not allowed to be used for industrial or commercial purposes without relevant authorities’ approval, and the lease of such buildings to companies like Kaixin may subject the lessor to pay premium fees to the PRC government. There can be no assurance that the lessor has obtained all or any of approvals from the relevant governmental authorities. In addition, some of Kaixin’s lessors have not provided it with documentation evidencing their title to the relevant leased properties. There can be no assurance that title to these properties which Kaixin currently leases will not be challenged. In addition, Kaixin has not registered any of its lease agreements with relevant PRC governmental authorities as required by PRC law, and although failure to do so does not in itself invalidate the leases, Kaixin may not be able to defend these leases against bona fide third parties.

 

Kaixin is not aware of any actions, claims or investigations being contemplated by government authorities with respect to the defects in its leased real properties or any challenges by third parties to its use of these properties. However, if third parties who purport to be property owners or beneficiaries of the mortgaged properties challenge its right to use the leased properties, Kaixin may not be able to protect its leasehold interest and may be ordered to vacate the affected premises, which could in turn materially and adversely affect its business and operating results.

 

The audit report of Kaixin included in this proxy statement is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board, and as such, you are deprived of the benefits of such inspection.

 

Kaixin’s independent registered public accounting firm that issues the audit report included in this proxy statement, as auditors of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board, or the PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Since Kaixin’s auditors are located in China, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, Kaixin’s auditors are not currently inspected by the PCAOB.

 

Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. This lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating Kaixin’s auditor’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

 

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of Kaixin’s auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in Kaixin’s reported financial information and procedures and the quality of its financial statements.

 

If additional remedial measures are imposed on the Big Four PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging the firms’ failure to meet specific criteria set by the SEC, with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

 

Starting in 2011 the Chinese affiliates of the “big four” accounting firms, including Kaixin’s independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the China Securities Regulatory Commission, or the CSRC.

 

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In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102E of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including Kaixin’s independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or, in extreme cases, the resumption of the current proceeding against all four firms.

 

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies, and the value of CM Seven Star’s ordinary shares may be adversely affected.

 

If Kaixin’s independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and it were unable to timely find another registered public accounting firm to audit and issue an opinion on its financial statements, its financial statements could be determined not to be in compliance with the requirements of the Exchange Act.

 

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Risk Factors Relating to CM Seven Star’s Business

 

CM Seven Star will be forced to liquidate the trust account if it cannot consummate a business combination by the date that is 15 months from the closing of the IPO, or January 30, 2019, or by the date that is 18 months from the closing of the IPO, or April 30, 2019, if we extend the period of time to consummate a business combination. In the event of a liquidation, CM Seven Star’s public shareholders will receive $10.00 per share and the CM Seven Star rights will expire worthless.

 

If CM Seven Star is unable to complete a business combination by the date that is 15 months from the closing of the IPO, or January 30, 2019, or by the date that is 18 months from the closing of the IPO, or April 30, 2019, if we extend the period of time to consummate a business combination, and is forced to liquidate, the per-share liquidation distribution will be $10.00. Furthermore, there will be no distribution with respect to the CM Seven Star rights, which will expire worthless as a result of CM Seven Star’s failure to complete a business combination.

 

You must tender your CM Seven Star ordinary shares in order to validly seek redemption at the extraordinary general meeting of shareholders.

 

In connection with tendering your shares for redemption, you must elect either to physically tender your share certificates to CM Seven Star’s transfer agent in each case by the business day prior to the extraordinary general meeting, or to deliver your ordinary shares to the transfer agent electronically using The Depository Trust Company’s DWAC (Deposit/Withdrawal At Custodian) System, which election would likely be determined based on the manner in which you hold your ordinary shares. The requirement for physical or electronic delivery by the business day prior to the extraordinary general meeting ensures that a redeeming holder’s election to redeem is irrevocable once the Business Combination is consummated. Any failure to observe these procedures will result in your loss of redemption rights in connection with the vote on the Business Combination.

 

If third parties bring claims against CM Seven Star, the proceeds held in trust could be reduced and the per-share liquidation price received by CM Seven Star’s shareholders may be less than $10.00.

 

CM Seven Star’s placing of funds in trust may not protect those funds from third party claims against CM Seven Star. Although CM Seven Star has received from many of the vendors, service providers (other than its independent accountants) and prospective target businesses with which it does business executed agreements waiving any right, title, interest or claim of any kind in or to any monies held in the trust account for the benefit of CM Seven Star’s public shareholders, they may still seek recourse against the trust account. Additionally, a court may not uphold the validity of such agreements. Accordingly, the proceeds held in trust could be subject to claims which could take priority over those of CM Seven Star’s public shareholders. If CM Seven Star liquidates the trust account before the completion of a business combination and distributes the proceeds held therein to its public shareholders, Bing Lin, our former officer and director, has contractually agreed that it will be liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by us for services rendered or contracted for or products sold to us, but only if such a vendor or prospective target business does not execute such a waiver. However, CM Seven Star cannot assure you that they will be able to meet such obligation. Therefore, the per-share distribution from the trust account for our shareholders may be less than $10.00 due to such claims.

 

Additionally, if CM Seven Star is forced to file a bankruptcy case or an involuntary bankruptcy case is filed against it which is not dismissed, the proceeds held in the trust account could be subject to applicable bankruptcy law, and may be included in CM Seven Star’s bankruptcy estate and subject to the claims of third parties with priority over the claims of its shareholders. To the extent any bankruptcy claims deplete the trust account, CM Seven Star may not be able to return $10.00 to our public shareholders.

 

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Any distributions received by CM Seven Star shareholders could be viewed as an unlawful payment if it was proved that immediately following the date on which the distribution was made, CM Seven Star was unable to pay its debts as they fell due in the ordinary course of business.

 

CM Seven Star’s Amended and Restated Memorandum and Articles of Association provides that it will continue in existence only until the date that is 15 months from the closing of the IPO, or January 30, 2019, or by the date that is 18 months from the closing of the IPO, or April 30, 2019, if we extend the period of time to consummate a business combination. If CM Seven Star is unable to consummate a transaction within the required time periods, upon notice from CM Seven Star, the trustee of the trust account will distribute the amount in its trust account to its public shareholders. Concurrently, CM Seven Star shall pay, or reserve for payment, from funds not held in trust, its liabilities and obligations, although CM Seven Star cannot assure you that there will be sufficient funds for such purpose. If there are insufficient funds held outside the trust account for such purpose, Bing Lin, our former officer and director, contractually agreed that, if it liquidates prior to the consummation of a business combination, he will be liable to ensure that the proceeds in the trust account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by CM Seven Star for services rendered or contracted for or products sold to it, but only if such a vendor or prospective target business does not execute such a waiver.

 

Thereafter, CM Seven Star’s sole business purpose will be to dissolve through the voluntary liquidation procedure under the Companies Law. In such a situation under the Companies Law, a liquidator would be appointed and would give at least 21 days’ notice to creditors of his intention to make a distribution by notifying known creditors (if any) and by placing a public advertisement in the Cayman Islands Official Gazette, although in practice this notice requirement need not necessarily delay the distribution of assets as the liquidator may be satisfied that no creditors would be adversely affected as a consequence of a distribution before this time period has expired. As soon as the affairs of the company are fully wound-up, the liquidator must lay his final report and accounts before a final general meeting which must be called by a public notice at least one month before it takes place. After the final meeting, the liquidator must make a return to the Registrar confirming the date on which the meeting was held and three months after the date of such filing the company is dissolved. It is CM Seven Star’s intention to liquidate the trust account to its public shareholders as soon as reasonably possible and CM Seven Star’s insiders have agreed to take any such action necessary to liquidate the trust account and to dissolve the company as soon as reasonably practicable if CM Seven Star does not complete a business combination within the required time period. Pursuant to CM Seven Star’s Amended and Restated Memorandum and Articles of Association, failure to consummate a business combination by January 30, 2019 (or April 30, 2019 if we extend the time to complete a business combination) will trigger an automatic winding up of the company.

 

If CM Seven Star is forced to enter into an insolvent liquidation, any distributions received by CM Seven Star shareholders could be viewed as an unlawful payment if it was proved that immediately following the date on which the distribution was made, CM Seven Star was unable to pay its debts as they fall due in the ordinary course of business. As a result, a liquidator could seek to recover all amounts received by CM Seven Star’s shareholders. Furthermore, CM Seven Star’s board may be viewed as having breached their fiduciary duties to its creditors and/or may have acted in bad faith, and thereby exposing itself and CM Seven Star to claims of damages, by paying public shareholders from the trust account prior to addressing the claims of creditors. CM Seven Star cannot assure you that claims will not be brought against it for these reasons.

 

If CM Seven Star’s due diligence investigation of Kaixin was inadequate, then shareholders of CM Seven Star following the Business Combination could lose some or all of their investment.

 

Even though CM Seven Star conducted a due diligence investigation of Kaixin, it cannot be sure that this diligence uncovered all material issues that may be present inside Kaixin or its business, or that it would be possible to uncover all material issues through a customary amount of due diligence, or that factors outside of Kaixin and its business and outside of its control will not later arise.

 

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All of CM Seven Star’s officers and directors own CM Seven Star ordinary shares and CM Seven Star rights which will not participate in liquidation distributions and, therefore, they may have a conflict of interest in determining whether the business combination is appropriate.

 

All of CM Seven Star’s officers and directors own an aggregate of [●] shares and [●] units of CM Seven Star. Such individuals have waived their right to redeem these shares, or to receive distributions with respect to these shares upon the liquidation of the trust account if CM Seven Star is unable to consummate a business combination. Accordingly, the CM Seven Star ordinary shares, as well as the CM Seven Star units purchased by our officers or directors, will be worthless if CM Seven Star does not consummate a business combination. Based on a market price of $[___] per ordinary share of CM Seven Star on [_______], 2019 and $[___] per right on [_______], 2019, the value of these shares and units was approximately $[___] million. The CM Seven Star ordinary shares acquired prior to the IPO, as well as the CM Seven Star units will be worthless if CM Seven Star does not consummate a business combination. Consequently, our directors’ and officers’ discretion in identifying and selecting Kaixin as a suitable target business may result in a conflict of interest when determining whether the terms, conditions and timing of the Business Combination are appropriate and in CM Seven Star’s shareholders’ best interest.

 

CM Seven Star is requiring shareholders who wish to redeem their ordinary shares in connection with a proposed business combination to comply with specific requirements for redemption that may make it more difficult for them to exercise their redemption rights prior to the deadline for exercising their rights.

 

CM Seven Star is requiring public shareholders who wish to redeem their ordinary shares to either tender their certificates to our transfer agent at any time prior to the business day immediately prior to the extraordinary general meeting or to deliver their shares to the transfer agent electronically using the Depository Trust Company’s, or DTC, DWAC (Deposit/Withdrawal At Custodian) System. In order to obtain a physical certificate, a shareholder’s broker and/or clearing broker, DTC and CM Seven Star’s transfer agent will need to act to facilitate this request. It is CM Seven Star’s understanding that shareholders should generally allot at least two weeks to obtain physical certificates from the transfer agent. However, because we do not have any control over this process or over the brokers or DTC, it may take significantly longer than two weeks to obtain a physical stock certificate. While we have been advised that it takes a short time to deliver shares through the DWAC System, we cannot assure you of this fact. Accordingly, if it takes longer than CM Seven Star anticipates for shareholders to deliver their ordinary shares, shareholders who wish to redeem may be unable to meet the deadline for exercising their redemption rights and thus may be unable to redeem their ordinary shares.

 

CM Seven Star will require its public shareholders who wish to redeem their ordinary shares in connection with the Business Combination to comply with specific requirements for redemption described above, such redeeming shareholders may be unable to sell their securities when they wish to in the event that the Business Combination is not consummated.

 

If CM Seven Star requires public shareholders who wish to redeem their ordinary shares in connection with the proposed Business Combination to comply with specific requirements for redemption as described above and the Business Combination is not consummated, CM Seven Star will promptly return such certificates to its public shareholders. Accordingly, investors who attempted to redeem their ordinary shares in such a circumstance will be unable to sell their securities after the failed acquisition until CM Seven Star has returned their securities to them. The market price for CM Seven Star’s ordinary shares may decline during this time and you may not be able to sell your securities when you wish to, even while other shareholders that did not seek redemption may be able to sell their securities.

 

CM Seven Star’s initial shareholders, including its officers and directors, control a substantial interest in CM Seven Star and thus may influence certain actions requiring a shareholder vote.

 

CM Seven Star’s initial shareholders, including all of its officers and directors, collectively own approximately [●]% of its issued and outstanding ordinary shares. However, if a significant number of shareholders vote, or indicate an intention to vote, against the Business Combination, CM Seven Star’s officers, directors, initial shareholders or their affiliates could make such purchases in the open market or in private transactions in order to influence the vote. CM Seven Star’s initial shareholders have agreed to vote any shares they own in favor of the Business Combination.

 

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If CM Seven Star’s security holders exercise their registration rights with respect to their securities, it may have an adverse effect on the market price of CM Seven Star’s securities.

 

CM Seven Star’s initial shareholders are entitled to make a demand that it register the resale of their insider shares at any time commencing three months prior to the date on which their shares may be released from escrow. Additionally, the purchasers of the private units and our initial shareholders, officers and directors are entitled to demand that we register the resale of the shares underlying the private units private warrants and private rights and any securities our initial shareholders, officers, directors or their affiliates may be issued in payment of working capital loans made to us at any time after we consummate a business combination. If such persons exercise their registration rights with respect to all of their securities, then there will be an additional [●] shares of CM Seven Star ordinary shares eligible for trading in the public market. The presence of these additional ordinary shares trading in the public market may have an adverse effect on the market price of CM Seven Star’s securities.

 

CM Seven Star will not obtain an opinion from an unaffiliated third party as to the fairness of the Business Combination to its shareholders.

 

CM Seven Star is not required to obtain an opinion from an unaffiliated third party that the price it is paying is fair to its public shareholders from a financial point of view. CM Seven Star’s public shareholders therefore, must rely solely on the judgment of CM Seven Star’s board of directors.

 

If the Business Combination’s benefits do not meet the expectations of financial or industry analysts, the market price of CM Seven Star’s securities may decline.

 

The market price of CM Seven Star’s securities may decline as a result of the Business Combination if:

 

CM Seven Star does not achieve the perceived benefits of the acquisition as rapidly as, or to the extent anticipated by, financial or industry analysts; or

 

The effect of the Business Combination on the financial statements is not consistent with the expectations of financial or industry analysts.

 

Accordingly, investors may experience a loss as a result of decreasing stock prices.

 

CM Seven Star’s directors and officers may have certain conflicts in determining to recommend the acquisition of Kaixin, since certain of their interests, and certain interests of their affiliates and associates, are different from, or in addition to, your interests as a shareholder.

 

CM Seven Star’s management and directors have interests in and arising from the Business Combination that are different from, or in addition to, your interests as a shareholder, which could result in a real or perceived conflict of interest. These interests include the fact that certain of the CM Seven Star ordinary shares owned by CM Seven Star’s management and directors, or their affiliates and associates, would become worthless if the Business Combination Proposal is not approved and CM Seven Star otherwise fails to consummate a business combination prior to its liquidation date.

 

CM Seven Star will incur significant transaction costs in connection with transactions contemplated by the Share Exchange Agreement.

 

CM Seven Star will incur significant transaction costs in connection with the Business Combination. If the Business Combination is not consummated, CM Seven Star may not have sufficient funds to seek an alternative business combination and may be forced to liquidate and dissolve.

 

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Risk Factors Relating to the Business Combination

 

CM Seven Star and Kaixin have incurred and expect to incur significant costs associated with the Business Combination. Whether or not the Business Combination is completed, the incurrence of these costs will reduce the amount of cash available to be used for other corporate purposes by CM Seven Star if the Business Combination is completed or by CM Seven Star if the Business Combination is not completed.

 

CM Seven Star and Kaixin expect to incur significant costs associated with the Business Combination. Whether or not the Business Combination is completed, CM Seven Star expects to incur approximately $[●] in expenses. These expenses will reduce the amount of cash available to be used for other corporate purposes by CM Seven Star if the Business Combination is completed or by CM Seven Star if the Business Combination is not completed.

 

In the event that a significant number of CM Seven Star’s ordinary shares are redeemed, its stock may become less liquid following the Business Combination.

 

If a significant number of CM Seven Star’s ordinary shares are redeemed, CM Seven Star may be left with a significantly smaller number of shareholders. As a result, trading in the shares of the surviving company following the Business Combination may be limited and your ability to sell your shares in the market could be adversely affected. Nasdaq may not list CM Seven Star’s shares on its exchange, which could limit investors’ ability to make transactions in CM Seven Star’s securities and subject CM Seven Star to additional trading restrictions.

 

CM Seven Star will be required to meet the initial listing requirements to be listed on the Nasdaq Stock Market. CM Seven Star may not be able to meet those initial listing requirements. Even if CM Seven Star’s securities are so listed, CM Seven Star may be unable to maintain the listing of its securities in the future.

 

Although CM Seven Star is currently listed on Nasdaq, pursuant to Nasdaq rules, the combined company must also meet Nasdaq initial listing requirements as of the close of the business combination. If the combined company fails to meet the initial listing requirements and Nasdaq does not list its securities on its exchange, the combined company could face significant material adverse consequences, including:

 

a limited availability of market quotations for its securities;

 

a limited amount of news and analyst coverage for the company; and

 

a decreased ability to issue additional securities or obtain additional financing in the future.

 

CM Seven Star may waive one or more of the conditions to the Business Combination without resoliciting shareholder approval for the Business Combination.

 

CM Seven Star may agree to waive, in whole or in part, some of the conditions to its obligations to complete the Business Combination, to the extent permitted by applicable laws. The board of directors of CM Seven Star will evaluate the materiality of any waiver to determine whether amendment of this proxy statement and resolicitation of proxies is warranted. In some instances, if the board of directors of CM Seven Star determines that a waiver is not sufficiently material to warrant resolicitation of shareholders, CM Seven Star has the discretion to complete the Business Combination without seeking further shareholder approval. For example, it is a condition to CM Seven Star’s obligations to close the Business Combination that there be no restraining order, injunction or other order restricting Kaixin’s conduct of its business, however, if the board of directors of CM Seven Star determines that any such order or injunction is not material to the business of Kaixin, then the board may elect to waive that condition and close the Business Combination.

 

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There will be a substantial number of CM Seven Star’s ordinary shares available for sale in the future that may adversely affect the market price of CM Seven Star’s ordinary shares.

 

CM Seven Star currently has authorized share capital of 202,000,000 shares consisting of 200,000,000 ordinary shares with a par value of $0.0001 per share and 2,000,000 shares of preferred stock with a par value of $0.0001 per share.

 

The shares to be issued in the business combination to the post-Business Combination shareholders, will be subject to certain restrictions on sale and cannot be sold for twelve months from the date of the Business Combination. In addition, the holders of the shares to be issued in the Business Combination are parties to an Investor Rights Agreement that would allow the sale of the such shares to occur as early as [●] days from the date of the Business Combination. After the expiration of this restricted period, there will then be an additional [______] shares that are eligible for trading in the public market. The availability of such a significant number of securities for trading in the public market may have an adverse effect on the market price of CM Seven Star’s shares.]

 

CM Seven Star’s shareholders will experience immediate dilution as a consequence of the issuance of ordinary shares as consideration in the Business Combination. Having a minority share position may reduce the influence that CM Seven Star’s current shareholders have on the management of CM Seven Star.

 

After the Business Combination, assuming no redemptions of ordinary shares for cash, CM Seven Star’s current public shareholders will own approximately [__]% of CM Seven Star, CM Seven Star’s current directors, officers and affiliates will own approximately [__]% of CM Seven Star, and the former stockholder of Kaixin will own approximately [__]% of CM Seven Star. Assuming redemption by holders of [________] CM Seven Star’s outstanding ordinary shares, CM Seven Star public shareholders will own approximately [__]% of CM Seven Star, CM Seven Star’s current directors, officers and affiliates will own approximately [__]% of CM Seven Star, and the former stockholder of Kaixin will own approximately [__]% of CM Seven Star. The minority position of the former CM Seven Star shareholders will give them limited influence over the management and operations of the post-Business Combination company.

 

CM Seven Star is an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies may make its securities less attractive to investors.

 

CM Seven Star is an “emerging growth company,” as defined in the JOBS Act. It may remain an “emerging growth company” until the fiscal year ended December 31, 2022. However, if its non-convertible debt issued within a three-year period or revenues exceeds $1 billion, or the market value of its ordinary shares that are held by non-affiliates exceeds $700 million on the last day of the second fiscal quarter of any given fiscal year, CM Seven Star would cease to be an emerging growth company as of the following fiscal year. As an emerging growth company, CM Seven Star is not required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, has reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and is exempt from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. Additionally, as an emerging growth company, CM Seven Star has elected to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As such, CM Seven Star’s financial statements may not be comparable to companies that comply with public company effective dates. As a result, potential investors may be less likely to invest in our securities.

 

Renren will control the outcome of shareholder actions in CM Seven Star.

 

Upon completion of the Business Combination, Renren will hold [___]% of CM Seven Star’s ordinary shares. Renren has advised Kaixin that it does not anticipate disposing of its voting control in us in the near future. Renren’s voting power gives it the power to control actions that require shareholder approval under Cayman Islands law, our memorandum and articles of association and Nasdaq requirements, including the election and removal of a majority of our board of directors, approval of significant mergers and acquisitions and other business combinations, and changes to our memorandum and articles of association. Further, CM Seven Star’s memorandum and articles of association to be adopted upon completion of the Business Combination, lists an extensive list of reserved matters which cannot be enacted without the consent of Renren.

 

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Renren’s control may cause transactions to occur that might not be beneficial to direct or indirect holders of Kaixin’s ordinary shares following the Business Combination and may prevent transactions that would be beneficial to you. For example, Renren’s voting control may prevent a transaction involving a change of control of us, including transactions in which you as a holder of our ordinary shares might otherwise receive a premium for your securities over the then-current market price. In addition, Renren is not prohibited from selling a controlling interest in us to a third party and may do so without your approval and without providing for a purchase of your ordinary shares. If Renren is acquired or otherwise undergoes a change of control, any acquirer or successor will be entitled to exercise the voting control and contractual rights of Renren, and may do so in a manner that could vary significantly from that of Renren.

 

We may have conflicts of interest with Renren and, because of Renren’s controlling interest in our company, we may not be able to resolve such conflicts on favorable terms for us.

 

Following the Business Combination, conflicts of interest may arise between Renren and us in a number of areas relating to past and ongoing relationships. Potential conflicts of interest that we have identified include the following:

 

Indemnification arrangements with Renren. In connection with the Business Combination, Kaixin will agreed to indemnify Renren with respect to lawsuits and other matters relating to its consumer auto business, including operations of that business when it was a private company and a subsidiary of Renren. These indemnification arrangements could result in our or Kaixin’s having interests that are adverse to those of Renren, for example, with respect to settlement arrangements in litigation. In addition, under these arrangements, Kaixin will agreed to reimburse Renren for liabilities incurred (including legal defense costs) in connection with any litigation, while Renren will be the party prosecuting or defending the litigation.

 

Non-competition arrangements with Renren. In connection with the Business Combination, Kaixin and Renren will enter into a non-competition agreement under which they agree not to compete with each other’s core business. Renren will agree not to compete with Kaixin in a business that is of the same nature as its business as disclosed in this proxy statement. Kaixin will agree not to compete with Renren in the business currently conducted by Renren, as described in its periodic filings with the SEC.

 

Employee recruiting and retention. Because both Renren and Kaixin are engaged in internet-related businesses in China, Kaixin may compete with Renren in the hiring of new employees, in particular with respect to media and advertising-related matters. In connection with the Business Combination, Kaixin and Renren will enter into a non-solicitation arrangement with Renren that restricts Kaixin and Renren from hiring any of each other’s employees.

 

Board members or executive officers of our company, Renren and Kaixin may have conflicts of interest. Kaixin’s board chairman, and member of our board upon completion of the Business Combination, Mr. Joseph Chen, is also a board chairman and chief executive officer of Renren. Kaixin’s director, and member of our board upon completion of the Business Combination, James Jian Liu, is also chief operating officer of Renren. Kaixin’s chief financial officer, and our chief financial officer upon completion of the Business Combination, Thomas Jintao Ren, is also chief financial officer of Renren. Kaixin’s vice president of finance, and our vice president of finance upon completion of the Business Combination, Ms. Suli Cui, also serves as finance director of Renren. In addition, CM or Kaixin may grant incentive share compensation to Renren’s employees and consultants, and Renren may grant incentive share compensation to our or Kaixin’s employes and consultants, from time to time. These relationships could create, or appear to create, conflicts of interest when these persons are faced with decisions with potentially different implications for Renren, Kaixin and us.

 

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Sale of shares in our company. Renren may decide to sell all or a portion of our shares that it holds upon the completion of the Business Combination to a third party, including to one of our or Kaixin’s competitors, thereby giving that third party substantial influence over our and/or Kaixin’s business or affairs. Such a sale could be contrary to the interests of our or Kaixin’s employees or other shareholders.

 

Allocation of business opportunities. Business opportunities may arise that each of we, Kaixin and/or Renren find attractive, and which would complement our respective businesses. Renren may decide to take the opportunities itself, which would prevent us and/or Kaixin from taking advantage of those opportunities.

 

Developing business relationships with Renren’s competitors. So long as Renren remains as our controlling shareholder, we and/or Kaixin may be limited in our ability to do business with its competitors, such as other online media companies in China. This may limit our ability to market our services or otherwise act in the best interests of our company, Kaixin and/or our other shareholders.

 

Although our company is a stand-alone public company, we expect to operate, for as long as Renren is our controlling shareholder, as an affiliate of Renren. Renren may from time to time make strategic decisions that it believes are in the best interests of its business as a whole, including our company.

 

These decisions may be different from the decisions that we would have made on our own. Renren’s decisions with respect to us, Kaixin and/or our businesses may be resolved in ways that favor Renren and therefore Renren’s own shareholders, which may not coincide with the interests of our other shareholders or Kaixin. We may not be able to resolve any potential conflicts, and even if we do so, the resolution may be less favorable to us than if we were dealing with a non-controlling shareholder. Even if all parties seek to transact business on terms intended to approximate those that could have been achieved among unaffiliated parties, this may not succeed in practice.

 

Following the Business Combination, we will be a “controlled company” within the meaning of the Nasdaq Stock Market Rules and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.

 

Following the Business Combination, we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because Renren controls more than 50% of our voting rights. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and will rely, on certain exemptions from corporate governance rules, including:

 

an exemption from the rule that a majority of our board of directors must be independent directors;

 

an exemption from the rule that the compensation of our chief executive officer must be determined or recommended solely by independent directors; and

 

an exemption from the rule that our director nominees must be selected or recommended solely by independent directors.

 

As a result, you will not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This proxy statement contains forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “will” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Examples of forward-looking statements in this proxy statement include, but are not limited to, statements regarding our disclosure concerning Kaixin’s operations, cash flows, financial position and dividend policy.

 

Forward-looking statements appear in a number of places in this proxy statement including, without limitation, in the sections entitled “Dividend Policy,” “Management’s Discussion and Analysis of Financial Conditions and Results of Operations of Kaixin Auto Group,” and “Kaixin Auto Group’s Business”. The risks and uncertainties include, but are not limited to:

 

future operating or financial results;

 

future payments of dividends and the availability of cash for payment of dividends;

 

Kaixin’s expectations relating to dividend payments and forecasts of its ability to make such payments;

 

future acquisitions, business strategy and expected capital spending;

 

assumptions regarding interest rates and inflation;

 

the combined company’s financial condition and liquidity, including its ability to obtain additional financing in the future to fund capital expenditures, acquisitions and other general corporate activities;

 

estimated future capital expenditures needed to preserve CM Seven Star’s capital base;

 

ability of the combined company to effect future acquisitions and to meet target returns; and

 

other factors discussed in “Risk Factors.”

 

Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in “Risk Factors” in this proxy statement. Accordingly, you should not rely on these forward-looking statements, which speak only as of the date of this proxy statement. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this proxy statement or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we will file from time to time with the Securities and Exchange Commission after the date of this proxy statement.

 

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CAPITALIZATION

 

The following table sets forth the capitalization on an audited, historical basis of each of CM Seven Star and Kaixin as of September 30, 2018 after giving effect to the Business Combination, assuming (i) that no holders of CM Seven Star ordinary shares exercise their redemption rights and CM Seven Star does not make any permitted repurchases and (ii) that the maximum number of holders of CM Seven Star ordinary shares have properly exercised their redemption rights and/or CM Seven Star has made permitted repurchases.  

 

   Historical   As Adjusted 
As of September 30, 2018   Kaixin
(unaudited)
    CM Seven
(unaudited)
   Assuming No Redemption   Assuming Maximum Redemption 
   (in thousands, except share amounts) 
Cash and cash equivalents  $11,992   $375   $211,386   $2,024 
Restricted cash and cash equivalents held in trust account       209,362         
                     
Short-term debt   54,300        54,300    54,300 
                     
Ordinary shares, subject to possible redemption       204,136         
Total stockholders’ equity   136,465    5,000    335,878    126,516 
Total capitalization  $190,765   $209,136   $390,178   $180,816 

  

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Extraordinary general MEETING OF CM Seven star SHAREHOLDERS

 

General

 

We are furnishing this proxy statement to the CM Seven Star shareholders as part of the solicitation of proxies by our board of directors for use at the extraordinary general meeting of CM Seven Star shareholders to be held on [●], 2019 and at any adjournment or postponement thereof. This proxy statement is first being furnished to our shareholders on or about [●], 2019 in connection with the vote on the Business Combination Proposal, the Authorized Share Increase Proposal, the Amendment Proposal, the Nasdaq Proposal, the Equity Incentive Plan Proposal and the Business Combination Adjournment Proposal. This document provides you with the information you need to know to be able to vote or instruct your vote to be cast at the extraordinary general meeting.

 

Date, Time and Place

 

The extraordinary general meeting of shareholders will be held on [●], 2019 at [●] a.m., at [●], or such other date, time and place to which such meeting may be adjourned or postponed.

 

Purpose of the Extraordinary General Meeting of CM Seven Star Shareholders

 

At the extraordinary general meeting of shareholders, we are asking holders of CM Seven Star ordinary shares to approve the following proposals:

 

●           To approve the Share Exchange Agreement and the transactions contemplated thereunder, including but not limited to the acquisition of all of the issued and outstanding shares and any other equity interests of Kaixin from the Seller, as provided for in the Share Exchange Agreement and the consideration paid to the Seller and the earn-out consideration by way of new issue of ordinary shares credited as fully paid in accordance with the Share Exchange Agreement, or the “Business Combination.” This proposal is referred to as the “Business Combination Proposal” or “Proposal No. 1.”

 

●          To approve increase in the number of authorized ordinary shares to [___] and removal of the class of preferred shares. This proposal is referred to as the “Authorized Share Increase Proposal” or “Proposal No. 2.”

 

●          To approve as a special resolution the change of CM Seven Star’s name to Kaixin Auto Holdings and the adoption of the Second Amended and Restated Memorandum and Articles of Association of CM Seven Star as further described herein. This proposal is referred to as the “Amendment Proposal” or “Proposal No. 3.”

 

           To approve the issuance of more than 20% of the issued and outstanding ordinary shares of CM Seven Star pursuant to the terms of the Share Exchange Agreement, as required by Nasdaq Listing Rules 5635(a) and (d). This proposal is referred to as the “Nasdaq Proposal” or “Proposal No. 4.”

 

           To approve the 2018 CM Seven Star Equity Incentive Plan. This proposal is referred to as the “Equity Incentive Plan Proposal” or “Proposal No. 5.”

 

           To approve the adjournment of the extraordinary general meeting in the event CM Seven Star does not receive the requisite shareholder vote to approve the Business Combination. This proposal is called the “Business Combination Adjournment Proposal” or “Proposal No. 6.”

  

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Recommendation of CM Seven Star’s Board of Directors

 

CM Seven Star’s board of directors:

 

has determined that each of the Business Combination Proposal, and the other Proposals are fair to, and in the best interests of, CM Seven Star and its shareholders;

 

has approved the Business Combination Proposal and the other Proposals; and

 

recommends that CM Seven Star’s shareholders vote “FOR” each of the Business Combination Proposal, the Authorized Share Increase Proposal, the Amendment Proposal, the Nasdaq Proposal, the Equity Incentive Plan Proposal and the Business Combination Adjournment Proposal.

 

CM Seven Star’s board of directors have interests that may be different from or in addition to your interests as a shareholder. See “The Business Combination Proposal — Interests of Certain Persons in the Business Combination” in this proxy statement for further information.

 

Record Date; Who is Entitled to Vote

 

We have fixed the close of business on [●], 2019, as the “record date” for determining those CM Seven Star shareholders entitled to notice of and to vote at the extraordinary general meeting. As of the close of business on [●], 2019, there were [●] ordinary shares of CM Seven Star outstanding and entitled to vote. Each holder of CM Seven Star ordinary shares is entitled to one vote per share on each of the Business Combination Proposal, the Authorized Share Increase Proposal, the Amendment Proposal, the Nasdaq Proposal, the Equity Incentive Plan Proposal, and the Business Combination Adjournment Proposal.

 

As of [●], 2019, CM Seven Star’s initial shareholders, either directly or beneficially, owned and were entitled to vote [●] ordinary shares, or approximately [●]% of CM Seven Star’s outstanding ordinary shares. With respect to the Business Combination, CM Seven Star’s initial shareholders have agreed to vote their respective ordinary shares acquired by them in favor of the Business Combination Proposal and related proposals. They have indicated that they intend to vote their shares, as applicable, “FOR” each of the other proposals, although there is no agreement in place with respect to these proposals.

 

Quorum and Required Vote for Shareholder Proposals

 

A quorum of CM Seven Star shareholders is necessary to hold a valid meeting. A quorum will be present at the extraordinary general meeting of CM Seven Star shareholders if a majority of the CM Seven Star ordinary shares issued and outstanding and entitled to vote at the extraordinary general meeting is represented in person or by proxy. Abstentions present in person and by proxy will count as present for the purposes of establishing a quorum but broker non-votes will not.

 

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Approval of the Business Combination Proposal, the Nasdaq Proposal, the Equity Incentive Plan Proposal and the Business Combination Adjournment Proposal will require the affirmative vote of the holders of a majority of the issued and outstanding ordinary shares of CM Seven Star present and entitled to vote at the extraordinary general meeting; provided, however, that if [●] or more of the holders of CM Seven Star ordinary shares exercise their redemption rights then the Business Combination will not be completed. Approval of the Authorized Share Increase Proposal and the Amendment Proposal will require the approval of at least two-thirds of the CM Seven Star ordinary shares present and entitled to vote at the extraordinary general meeting. Attending the extraordinary general meeting either in person or by proxy and abstaining from voting will have the same effect as voting against all the Proposals and, assuming a quorum is present, broker non-votes will have no effect on the voting on Proposals.

 

Voting Your Shares

 

Each CM Seven Star ordinary share that you own in your name entitles you to one vote for each Proposal on which such shares are entitled to vote at the extraordinary general meeting. Your proxy card shows the number of ordinary shares that you own.

 

There are two ways to ensure that your CM Seven Star ordinary shares, as applicable, are voted at the extraordinary general meeting:

 

You can cause your shares to be voted by signing and returning the enclosed proxy card to [__] not later than the time appointed for the extraordinary general meeting or adjourned meeting. If you submit your proxy card, your “proxy,” whose name is listed on the proxy card, will vote your shares as you instruct on the proxy card. If you sign and return the proxy card but do not give instructions on how to vote your shares, your shares will be voted, as recommended by our board, “FOR” the adoption of the Business Combination Proposal, the Authorized Share Increase Proposal, the Amendment Proposal, the Nasdaq Proposal, the Equity Incentive Plan Proposal and the Business Combination Adjournment Proposal. Votes received after a matter has been voted upon at the extraordinary general meeting will not be counted.

 

You can attend the extraordinary general meeting and vote in person. We will give you a ballot when you arrive. However, if your shares are held in the name of your broker, bank or another nominee, you must get a proxy from the broker, bank or other nominee. That is the only way we can be sure that the broker, bank or nominee has not already voted your shares.

 

IF YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOUR SHARES WILL BE VOTED IN FAVOR OF THE BUSINESS COMBINATION PROPOSAL (AS WELL AS THE OTHER PROPOSALS). IN ORDER TO REDEEM YOUR SHARES, YOU MUST CONTINUE TO HOLD YOUR SHARES THROUGH THE CLOSING DATE OF THE BUSINESS COMBINATION AND TENDER YOUR PHYSICAL STOCK CERTIFICATE TO OUR TRANSFER AGENT AT LEAST ONE BUSINESS DAY PRIOR TO THE CONSUMMATION OF THE BUSINESS COMBINATION. IF THE BUSINESS COMBINATION IS NOT COMPLETED, THEN THESE SHARES WILL NOT BE REDEEMED FOR CASH. IF YOU HOLD THE SHARES IN STREET NAME, YOU WILL NEED TO ELECTRONICALLY TRANSFER YOUR SHARES TO THE DTC ACCOUNT OF CONTINENTAL STOCK TRANSFER & TRUST COMPANY, OUR TRANSFER AGENT, AT LEAST ONE BUSINESS DAY PRIOR TO THE CONSUMMATION OF THE BUSINESS COMBINATION.

 

Revoking Your Proxy

 

If you give a proxy, you may revoke it at any time before it is exercised by doing any one of the following:

 

you may send another proxy card with a later date;

 

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if you are a record holder, you may notify our corporate secretary in writing before the extraordinary general meeting that you have revoked your proxy; or

 

you may attend the extraordinary general meeting, revoke your proxy, and vote in person, as indicated above.

 

Who Can Answer Your Questions About Voting Your Shares

 

If you have any questions about how to vote or direct a vote in respect of your ordinary shares, you may call [●], our proxy solicitor, at [●], or CM Seven Star at +852 3796 2750.

 

No Additional Matters May Be Presented at the Extraordinary General Meeting

 

This extraordinary general meeting has been called only to consider the approval of the Business Combination. Under CM Seven Star’s Amended and Restated Memorandum and Articles of Association, other than procedural matters incident to the conduct of the extraordinary general meeting, no other matters may be considered at the extraordinary general meeting if they are not included in the notice of the extraordinary general meeting.

 

Redemption Rights

 

Pursuant to CM Seven Star’s Amended and Restated Memorandum and Articles of Association, a holder of CM Seven Star ordinary shares may demand that CM Seven Star redeem such ordinary shares for cash. Demand may be made by:

 

Voting for or against the business combination and electing redemption by checking the appropriate box on the proxy card; and

 

Tendering the CM Seven Star ordinary shares for which you are electing redemption by the business day prior to the extraordinary general meeting by either:

 

Delivering certificates representing CM Seven Star’s ordinary shares to CM Seven Star’s transfer agent, or

 

Delivering the CM Seven Star ordinary shares electronically through the DWAC system; and

 

Not selling or otherwise transferring the CM Seven Star ordinary shares until the closing of the Business Combination (tendering your ordinary shares for redemption is not considered selling or transferring your shares).

 

CM Seven Star shareholders will be entitled to redeem their CM Seven Star ordinary shares for a full pro rata share of the trust account (currently anticipated to be no less than approximately $10.00 per share) net of taxes payable.

 

In connection with tendering your shares for redemption, you must elect either to physically tender your share certificates to CM Seven Star’s transfer agent or deliver your shares to the transfer agent electronically using The Depository Trust Company’s DWAC (Deposit/Withdrawal At Custodian) System, in each case, by the business day prior to the extraordinary general meeting.

 

Through the DWAC system, this electronic delivery process can be accomplished by contacting your broker and requesting delivery of your shares through the DWAC system. Delivering shares physically may take significantly longer. In order to obtain a physical stock certificate, a shareholder’s broker and/or clearing broker, DTC, and CM Seven Star’s transfer agent will need to act together to facilitate this request. There is a nominal cost associated with the above-referenced tendering process and the act of certificating the shares or delivering them through the DWAC system. The transfer agent will typically charge the tendering broker $45 and the broker would determine whether or not to pass this cost on to the redeeming holder. It is CM Seven Star’s understanding that shareholders should generally allot at least two weeks to obtain physical certificates from the transfer agent. CM Seven Star does not have any control over this process or over the brokers or DTC, and it may take longer than two weeks to obtain a physical stock certificate. Shareholders who request physical stock certificates and wish to redeem may be unable to meet the deadline for tendering their ordinary shares before exercising their redemption rights and thus will be unable to redeem their ordinary shares.

 

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In the event that a shareholder tenders its ordinary shares and decides prior to the consummation of the Business Combination that it does not want to redeem its ordinary shares, the shareholder may withdraw the tender. In the event that a shareholder tenders ordinary shares and the business combination is not completed, these ordinary shares will not be redeemed for cash and the physical certificates representing these ordinary shares will be returned to the shareholder promptly following the determination that the Business Combination will not be consummated. CM Seven Star anticipates that a shareholder who tenders ordinary shares for redemption in connection with the vote to approve the Business Combination would receive payment of the redemption price for such ordinary shares soon after the completion of the Business Combination.

 

If properly demanded by CM Seven Star’s public shareholders, CM Seven Star will redeem each share into a pro rata portion of the funds available in the Trust Account, calculated as of two business days prior to the anticipated consummation of the Business Combination. As of the record date, this would amount to approximately $10.00 per share. If you exercise your redemption rights, you will be exchanging your CM Seven Star ordinary shares for cash and will no longer own the ordinary shares. If CM Seven Star is unable to complete the Business Combination by the date that is 15 months from the closing of the IPO, or January 30, 2019, or by the date that is 18 months from the closing of the IPO, or April 30, 2019, if we extend the period of time to consummate a business combination, it will liquidate and dissolve and public shareholders would be entitled to receive approximately $10.00 per share upon such liquidation.

 

The Business Combination will not be consummated if the holders of [●] or more of CM Seven Star’s ordinary shares exercise their redemption rights.

 

Tendering Ordinary shares Share Certificates in connection with Redemption Rights

 

CM Seven Star is requiring the CM Seven Star public shareholders seeking to exercise their redemption rights, whether they are record holders or hold their shares in “street name,” to either tender their certificates to CM Seven Star’s transfer agent, or to deliver their shares to the transfer agent electronically using Depository Trust Company’s DWAC (Deposit/Withdrawal At Custodian) System, at the holder’s option prior to the business day immediately preceding the consummation of the proposed Business Combination. There is a nominal cost associated with the above-referenced tendering process and the act of certificating the shares or delivering them through the DWAC System. The transfer agent will typically charge the tendering broker $45.00 and it would be up to the broker whether to pass this cost on to the redeeming holder. However, this fee would be incurred regardless of whether CM Seven Star requires holders seeking to exercise redemption rights to tender their ordinary shares. The need to deliver ordinary shares is a requirement of exercising redemption rights regardless of the timing of when such delivery must be effectuated.

 

Any request for redemption, once made, may be withdrawn at any time up to the business day immediately preceding the consummation of the proposed Business Combination. Furthermore, if a shareholder delivered his certificate for redemption and subsequently decided prior to the date immediately preceding the consummation of the proposed Business Combination not to elect redemption, he may simply request that the transfer agent return the certificate (physically or electronically).

 

A redemption payment will only be made in the event that the proposed Business Combination is consummated. If the proposed Business Combination is not completed for any reason, then public shareholders who exercised their redemption rights would not be entitled to receive the redemption payment. In such case, CM Seven Star will promptly return the share certificates to the public shareholder.

 

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Appraisal Rights

 

Appraisal rights are not available to holders of CM Seven Star ordinary shares in connection with the proposed Business Combination.

 

Proxies and Proxy Solicitation Costs

 

We are soliciting proxies on behalf of our board of directors. This solicitation is being made by mail but also may be made by telephone or in person. CM Seven Star and its directors, officers and employees may also solicit proxies in person, by telephone or by other electronic means. Any solicitation made and information provided in such a solicitation will be consistent with the written proxy statement and proxy card. [●], a proxy solicitation firm that CM Seven Star has engaged to assist it in soliciting proxies, will be paid its customary fee of approximately $[●] and out-of-pocket expenses.

 

CM Seven Star will ask banks, brokers and other institutions, nominees and fiduciaries to forward its proxy materials to their principals and to obtain their authority to execute proxies and voting instructions. CM Seven Star will reimburse them for their reasonable expenses.

 

If you send in your completed proxy card, you may still vote your shares in person if you revoke your proxy before it is exercised at the extraordinary general meeting.

 

CM Seven Star Initial Shareholders

 

On July 11, 2017, the Company issued 4,312,500 ordinary shares to our initial shareholders for an aggregate amount of $25,000. On October 25, 2017, an additional 862,500 ordinary shares of CM Seven Star were issued to the initial shareholders for an aggregate amount of $6,038. The 5,175,000 Insider Shares include an aggregate of up to 675,000 shares that were subject to forfeiture to the extent that the underwriters’ over-allotment was not exercised in full or in part, so that the initial shareholders would own 20% of CM Seven Star’s issued and outstanding shares after the IPO. Simultaneous with the consummation of the IPO, we consummated the private placement of 475,000 private Units (“Private Placement Units”) at a price of $10.00 per Private Placement Unit, generating total proceeds of $4,750,000. The Private Placement Units were purchased by CM Seven Star’s sponsor. The underwriters exercised the over-allotment in part and on November 3, 2017, CM Seven Star consummated the private sale of an additional 52,726 private units to its sponsor, generating gross proceeds of $527,260. On November 3, 2017, the underwriters cancelled the remainder of the over-allotment option. In connection with the cancellation of the remainder of the over-allotment option, we cancelled an aggregate of 15,927 insider shares issued to our sponsor prior to the IPO.

 

Pursuant to a registration rights agreement between us and our initial shareholders are entitled to certain registration rights with respect to the CM Seven Star rights held by them, as well as the underlying securities. The holders of these securities are entitled to make up to two demands that CM Seven Star register such securities. The holders of the initial shares can elect to exercise these registration rights at any time commencing three months prior to the date on which these ordinary shares are to be released from escrow. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the consummation of a business combination. CM Seven Star will bear the expenses incurred in connection with the filing of any such registration statements.

 

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THE BUSINESS COMBINATION PROPOSAL

 

The discussion in this proxy statement of the Business Combination and the principal terms of the Share Exchange Agreement, is subject to, and is qualified in its entirety by reference to, the Share Exchange Agreement. The full text of the Share Exchange Agreement is attached hereto as Annex A, which is incorporated by reference herein.

 

General Description of the Business Combination

 

Business Combination with Kaixin; Business Combination Consideration

 

Upon the closing of the transactions contemplated in the Share Exchange Agreement, CM Seven Star will acquire 100% of the issued and outstanding securities of Kaixin, in exchange for approximately 28.3 million ordinary shares of CM Seven Star, or one CM Seven Star share for approximately 4.85 outstanding shares of Kaixin. An additional 4.7 million shares million shares of CM Seven Star will be issued at closing in exchange for currently outstanding options in Kaixin or reserved for issuance under an equity incentive plan. Additionally, 19.5 million earnout shares are to be issued and held in escrow. The Seller may be entitled to receive earnout shares as follows: (1) if the Company’s gross revenue for the year ended December 31, 2019 is greater than or equal to RMB 5,000,000,000, the Seller is entitled to receive 1,950,000 ordinary shares of CM Seven Star; (2) if the Company’s adjusted EBITDA for the year ended December 31, 2019 is greater than or equal to RMB 150,000,000, the Seller is entitled to receive 3,900,000 ordinary shares of CM Seven Star, increasing proportionally to 7,800,000 ordinary shares if Company’s adjusted EBITDA is greater than or equal to RMB 200,000,000; and (3) if the Company’s adjusted EBITDA for the year ended December 31, 2020 is greater than or equal to RMB 340,000,000, the Seller is entitled to receive 4,875,000 ordinary shares of CM Seven Star, increasing proportionally to 9,750,000 ordinary shares if the Company’s adjusted EBITDA is greater than or equal to RMB 480,000,000. By way of example, if the combined company’s adjusted EBITDA is equal to RMB175,000,000 for the year ended December 31, 2019, the Seller would receive 5,850,000 ordinary shares ((a) (i) 175,000,000 – 150,000,000, divided by (ii) 200,000,000 – 150,000,000 multiplied by (b) 7,800,000 – 3,900,000, plus (c) 3,900,000). 

 

CM Seven Star currently has authorized share capital of 202,000,000 shares consisting of 200,000,000 ordinary shares with a par value of $0.0001 per share and 2,000,000 shares of preferred stock with a par value of $0.0001 per share.

 

After the Business Combination, assuming no redemptions of ordinary shares for cash, CM Seven Star’s current public shareholders will own approximately [●]% of CM Seven Star, CM Seven Star’s current directors, officers and affiliates will own approximately [●]% of CM Seven Star, and the Seller will own approximately [●]% of CM Seven Star. Assuming redemption by holders of [●] of CM Seven Star’s ordinary shares, CM Seven Star public shareholders will own approximately [●]% of CM Seven Star, CM Seven Star’s current directors, officers and affiliates will own approximately [●]% of CM Seven Star, and the Seller will own approximately [●]% of CM Seven Star. Upon consummation of the Business Combination, Kaixin will be a wholly-owned subsidiary of CM Seven Star.

 

Assuming the Business Combination Proposal is approved, the parties to the transaction expect to close the Business Combination on [●], 2019.

 

Background of the Business Combination

 

CM Seven Star was incorporated as a blank check company on November 28, 2016, under the laws of the Cayman Islands, for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or similar business combination with one or more businesses or entities, which we refer to as a “target business.” CM Seven Star’s efforts to identify a prospective target business were not limited to any particular industry or geographic region.

 

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CM Seven Star completed its initial public offering (“IPO”) on October 30, 2017 of 18,000,000 units, with each unit consisting of one ordinary share (“Ordinary Share”), par value $.0001 per share, one-half of a redeemable warrant (“Warrant”) and one right (“Right”) to receive one-tenth of an ordinary share upon consummation of an initial business combination. Simultaneous with the consummation of the IPO, we consummated the private placement of 475,000 private Units (“Private Placement Units”) at a price of $10.00 per Private Placement Unit, generating total proceeds of $4,750,000. The Private Placement Units were purchased by CM Seven Star’s sponsor. The underwriters in the IPO exercised the over-allotment option in part and on November 3, 2017, the underwriters purchased 2,636,293 over-allotment option Units, which were sold at an offering price of $10.00 per Unit, generating gross proceeds of $26,362,930. Simultaneously with the sale of the over-allotment Units, CM Seven Star consummated the private sale of an additional 52,726 Private Placement Units to its sponsor, generating gross proceeds of $527,260. On November 3, 2017, the underwriters canceled the remainder of the over-allotment option. In connection with the cancellation of the remainder of the over-allotment option, CM Seven Star canceled an aggregate of 15,927 Ordinary Shares issued to our sponsor prior to the IPO and private placement.

 

After deducting the underwriting discounts and commissions and the offering expenses, a total of $206,362,930 was deposited into a trust account established for the benefit of CM Seven Star’s public shareholders, and the remaining proceeds became available to be used to provide for business, legal and accounting due diligence on prospective business combinations and continuing general and administrative expenses. As of [●], we have approximately $[●] of unused net proceeds that were not deposited into the trust fund to pay future general and administrative expenses. The net proceeds deposited into the trust fund remain on deposit in the trust fund earning interest. As of [●], there was $[●] held in the trust fund (including $[●] of accrued interest, of which we can withdraw to pay income tax or other tax obligations.

 

In accordance with CM Seven Star’s Amended and Restated Memorandum and Articles of Association, the amounts held in the trust account may only be used by CM Seven Star upon the consummation of a business combination, except that there can be released to CM Seven Star, from time to time, any interest earned on the funds in the trust account that it may need to pay its tax obligations. The remaining interest earned on the funds in the trust account will not be released until the earlier of the completion of a business combination and CM Seven Star’s liquidation. CM Seven Star executed a definitive agreement on November 2, 2018 and it must liquidate unless a business combination is consummated by the date that is 15 months from the closing of the IPO, or January 30, 2019, or by the date that is 18 months from the closing of the IPO, or April 30, 2019, if we extend the period of time to consummate a business combination.

 

Promptly after the IPO, the officers and directors of CM Seven Star commenced the process of locating potential targets.  Over the course of CM Seven Star’s search for target companies, CM Seven Star management evaluated in excess of 20 target companies. CM Seven Star entered into advanced discussions with the following 4 targets in different industries, a $450M commercial bank/private bank, a $700M ATM network operator, a $650M energy business, a $1000M auto finance business, but did not proceed with these targets for the reasons indicated:

 

1.the shareholder of the bank withdrew the sale of equity due to low valuation offered;
2.the growth of mobile & online payment as a threat to cash usage in a mature Western economy;
3.low gas prices in North America, especially in Canada, due to the increasing supply from shale gas and the lack of infrastructure for exporting gas to Asia;
4.the shareholders of the auto finace company turned down the SPAC merger discussion and decided to pursue and IPO instead.

 

On June 21, 2018, Thomas Jintao Ren, Chief Financial Officer of Kaixin Auto, reached Jiong Shao, director of CM Seven Star, who knows Thomas Jintao Ren before when Jiong Shao was a banker, by phone to reflect its interest to merge with CM Seven Star. On June 22, 2018, Jiong Shao emailed Sing Wang, Chief Executive Officer of CM Seven Star, to introduce Thomas.

 

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On June 22, 2018, Sing Wang emailed Thomas Jintao Ren, who introduced James Jian Liu, Renren’s Chief Operating Officer, to Sing. Sing telephoned James and spoke for more than one hour on the merits of a SPAC transaction and to learn about Kaixin’s business. Sing then invited James to Hong Kong to meet in person.

 

On June 23, 2018, James Liu and Sing Wang met from 9:30am to 5:00pm Hong Kong time to discuss Kaixin and a potential transaction with CM Seven Star.

 

On June 24, 2018, Sing Wang spoke with Steven Levine, CEO of EarlyBirdCapital, Inc., by phone to discuss Kaixin as a possible merger candidate.

 

On June 25, 2018, Sing Wang signed an NDA on behalf of CM Seven Star with Kaixin.

 

From June 26, 2018 to July 3, 2018, Sing Wang met in New York with various fund managers as well as investment bankers and other advisors, to discuss several merger candidates, including Kaixin, to gauge investor appetite, valuation and potential concerns. Sing was also seeking a bulge bracket investment banking firm to help CM Seven Star during the merger process.

 

On July 6, 2018, Sing Wang met with Anthony Ho, director of CM Seven Star, at AIA Central to discuss the results of the New York trip with him. Sing also spoke with Steve Cannon, Chief Financial Officer and director of CM Seven Star, Jiong Shao and Mr. Wang Dongzhi, the then Chief Executive Officer of China Minsheng Financial Holding Corporation Limited (“CMF”), the entity that controls CM Seven Star’s sponsor, Shareholder Value Fund (“SVF”), about Kaixin.

 

From On July 7, 2018 to July 8, 2018, Sing Wang flew from Hong Kong to Hangzhou and then Beijing to discuss with various parties the potential CM Seven Star merger candidates. Joseph Chen and James Liu, Chairman and CEO of Kaixin, respectively, met with Sing at Renren’s offices for several hours to discuss Kaixin’s business model, valuation expectations, the CM Seven Star decision process and business combination process.

 

From July 8, 2018 to July 19, 2018, various telephone conferences with Kaixin and EarlyBirdCapital were conducted. Sing Wang also met with the management of CM Seven Star, CMF and SVF to further discuss a potential transaction with Kaixin. Sing also met with several Asia based fund managers and investment banks to see if there would be any interest in the transaction with Kaixin.

 

From July 23, 2018 to July 24, 2018, Sing Wang met a few fund managers in New York to update them on CM Seven Star’s progress and to discuss a potential transaction with Kaixin.

 

On July 25, 2018, Sing Wang met James Liu and Joseph Chen in New York for further discussion and negotiations on a potential transaction.

 

On July 26, 2018, Joseph Chen, James Liu, and Sing Wang met with several employees of EarlyBirdCapital and presented Kaixin to them and conducted a question and answer session. Sing also met with a couple of bulge bracket investment banks in New York who are familiar with the used car business in China and/or the United States.

 

From July 27, 2018 to August 10, 2018, Sing Wang, together with CM Seven Star’s U.S. counsel Loeb & Loeb LLP, negotiated the terms of an letter of intent with James Liu and Kaixin’s counsel, Simpson Thatcher & Bartlett.

 

On August 12, 2018, the CM Seven Star board held a meeting at which Sing Wang gave a deal update with respect to the Kaixin transaction.

 

From August 15, 2018 to August 17, 2018, several meetings were held with respect to the Kaixin transaction. Anthony Ho met with Joseph Chen in Phoenix on August 15, 2018. On the next day, Anthony and Sing met with EarlyBirdCapital and with Loeb and Loeb to discuss the LOI with Kaixin. A follow-up meeting between Sing Wang and EarlyBirdCapital took place on August 17, 2018 to evaluate two targets in addition to Kaixin – a Canadian oil and gas company and an online wealth management and private banking firm in China. The Company determined that both of these opportunities, as compared to Kaixin, had certain characteristics that lessened the likelihood of a successful business combination being consummated. In particular, the oil and gas sector had been experiencing a significant reduction in the benchmark prices of its product due to a global supply glut, affecting asset valuations and turning investor appetite bearish towards the sector. In addition, the Company determined that Kaixin’s easily understandable business model, large platform in its premium used car segment, attractive technology and potential for growth surpassed the attributes that the Chinese financial institution opportunity presented at the time. Following this meeting, Mr. Wang consulted with members of the Board of Directors and it was decided that Kaixin was a preferable target.

  

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From August 20, 2018 to August 24, 2018, negotiations on a letter of intent continued between Sing Wang and members of the Kaixin team telephone conferences.

 

On August 27, 2018, Sing Wang updated Anthony Ho and Steve Cannon about the transaction with Kaixin and the terms of the letter of intent.

 

On August 28, 2018, Sing Wang met with Wang Dongzhi to discuss the transaction with Kaixin and the terms of the letter of intent.

 

On August 28, 2018, Sing Wang signed a letter of intent on behalf of CM Seven Star with Kaixin. The letter of intent provided for the issuance at closing of 33 million shares of CM Seven Star, with an additional 25 million shares being issued if certain targets were met. The 25 million additional shares would be issued as follows:

 

·In the event that the Kaixin’s gross revenue was greater than or equal to RMB 5,000,000,000 for the year ended December 31, 2019, Kaixin former shareholders would receive 5 million shares.

 ·In the event that Kaixin’s adjusted EBITDA was greater than or equal to RMB 150,000,000 for the year ended December 31, 2019, Kaixin’s former shareholder would receive the following: 10,000,000 shares if Kaixin’s non-GAAP earnings equaled RMB 150,000,000; 20,000,000 shares if Kaixin’s non-GAAP earnings equaled or exceeded RMB 200,000,000; and a proportional number of shares between if Kaixin’s non-GAAP earning were between 10,000,000 and 20,000,000.

·

In the event that the closing price of the combined company’s shares was greater than or equal to $13.00 per share for any sixty trading days in a ninety trading day period within 18 months after the closing of the business combination, all 25 million shares would be issued notwithstanding the combined company’s revenue for the year ended December 31, 2019.

 

After signing the letter of intent on August 28, 2018, the SVF team began to review third party professional firms to do due diligence on Kaixin.

 

On September 5, 2018, Sing Wang and members of the SVF team met with Kaixin’s team in its Beijing office to start due diligence review.

 

On September 12, 2018, Sing Wang, on behalf of CM Seven Star, engaged Addleshaw Goddard (as offshore counsel for the legal due diligence), King & Wood (as the PRC counsel for the legal due diligence), Ernst & Young (for the financial and tax due diligence) and Deloitte Advisory (for commercial due diligence).

 

On September 21, 2018 Sing Wang, on behalf of CM Seven Star, engaged Deloitte (Kaixin’s auditor) to provide diligence information to Ernst & Young.

 

In September and early October, 2018, due diligence was carried out by the SVF team and the various third party professional firms.

 

On September 27, 2018, a meeting was held in the Hong Kong office of CM Seven Star. The SVF team and third-party professional firms reported on the due diligence conducted to Anthony Ho, Sing Wang and Steven Levine.

 

On October 7, 2018, Sing Wang and the SVF team, by conference call reported to the board of directors of CM Seven Star results of the due diligence process and the progress of a transaction with Kaixin.

 

In October and early November, 2018, the various deal terms negotiated the terms of a definitive agreement between CM Seven Star and Kaixin. During those meetings, the earnout structure and amount of shares to be issued subject to the achievement of certain finanacial and stock prices performance were changed: the maximum additional shares being issued was reduced to 19.5 million, the financial performance targets incorporated Kaixin’s adjusted EBITDA for the year ended Dececmber 2020, the $13.00 stock performance target period was reduced to 15 months and another stock performance target of $13.50 was incorporated for a period of 30 months after the closing of the business combination. The earnout structure is described in futher detail under “The Share Exchange Agreement” beginning on page 84.

 

On October 24, 2018, the CM Seven Star board held a special board meeting to review the transaction with Kaixin. At this meeting, CM Seven Star’s Board of Directors approved the transaction and authorized CM Seven Star to enter into the definitive agreement with Kaixin for the purpose of consummating a business combination.

 

On October 25, 2018, Renren and Kaixin boards approved the transaction.

 

On November 2, 2018, Renren obtained shareholder consent from SoftBank Group Corp. for this transaction pursuant to its articles of association.

 

On November 2, 2018, the Share Exchange Agreement was signed by both parties. The Share Exchange Agreement provides for the issuance of 33 million shares (which includes 28.3 million shares and 4.7 million shares included in an incentive plan) at closing, plus the issuance of an additional 19.5 million CM Seven Star shares if certain targets were met, which are described in detail below under “The Share Exchange Agreement” beginning on page 84.

 

On November 6, 2018, the signing of the Share Exchange Agreement by CM Seven Star and Kaixin Auto was announced to the public. CM Seven Star subsequently filed a Current Report on Form 8-K including the press release, a copy of the Share Exchange Agreement and a presentation for investors.

 

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CM Seven Star’s Board’s Reasons for the Approval of the Business Combination

 

The board of directors held two meetings to discuss, among other things, a potential business combination with Kaixin. On November 2, 2018, the board of directors unanimously approved the Share Exchange Agreement and the transactions contemplated thereby, determined that the Business Combination is in the best interests of CM Seven Star stockholders, directed that the Agreements be submitted to CM Seven Star’s stockholders for approval and adoption, and recommended that CM Seven Star’s stockholders approve and adopt the agreements and transactions contemplated thereby. Prior to reaching the decision to approve the agreements and the transaction, our board of directors received information from its legal and financial advisors, as well as other third-party resources. No reports as to the valuation of Kaixin were produced by any of our advisors.

 

In order to become more familiar with the industry Kaixin operates in, members of our board of directors and management team reviewed due diligence findings of our advisors as well as various publicly available industry-specific research published by third-parties and also analyzed data and material from Kaixin, including but not limited to, Kaixin’s existing business model, historic and projected financial statements, valuation analysis, material agreements and other due diligence material. Our management team supported by affiliates of our Sponsor also coordinated financial, accounting and legal due diligence with the assistance from third-party firms engaged for such activities.

 

Since CM Seven Star’s IPO in November of 2017, our management team and board of directors have been conducting a search for potential business combination partners. CM Seven Star’s management and board of directors considered a wide variety of factors in connection with its evaluation of the Business Combination but did not find it to be practical to quantify or assign weights to the specific factors in reaching its final decision. In considering the Business Combination with Kaixin, our management team and board of directors determined that Kaixin met, in some fashion, all of the criteria we set for our target company screening:

 

  Readily understandable business model with clear public market comparables

Kaixin is the largest premium used auto dealership group in China in terms of the number of cities and locations of its Dealerships, and the second largest based on revenues in 2017, according to iResearch. Kaixin provides used car buyers in China with access to a wide selection of used vehicles across its network of Dealerships, with a focus on premium brands. In addition to auto sales, for the convenience of its customers, Kaixin offers value-added services to its customers and dealer networks, including financing, insurance, extended warranties and after-sales services. Kaixin’s unique data-driven SaaS platform employs advanced data analytics and artificial intelligence, or AI. Kaixin’s Dealership network offers scalability without increasing its Dealership footprint and removes a key bottleneck of vehicle sourcing through its cooperation with Kaixin Affiliated Network Dealers.

 

Existing public market comparable companies include CarMax (NYSE: KMX) and Carvana (NYSE: CVNA); both have strong public markets followings and support from investors and investment banks, we believe that Kaixin’s business model will be easily understood by the investment community. Furthermore, as further described later in this section, the board believes that the transaction represents an attractive investment opportunity due to the Kaixin’s post-Business Combination valuation discount to similar publicly-listed comparable companies.

 

Largest premium used car participant in fast growing China market

Kaixin owns and operates the largest premium used car dealership network in China in terms of the number of cities and locations of its Dealerships, and the second largest based on revenues in 2017, according to iResearch. Kaixin’s business model is centered around both internet technology and an offline strategy, as more than 99.5% of used car transactions in China were completed offline in 2017, according to iResearch, which was driven by premium used car buyers’ preference to evaluate cars in person as part of their purchasing decision.

 

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Kaixin operates in the PRC, which is the world’s second largest market by car parc (number of vehicles in operation) with 185 million cars in 2017, according to iResearch. China is expected to have the world’s largest car parc by 2023, representing a CAGR of 10.2% from 2017, according to iResearch. The premium used car market is the fastest growing segment of China’s used car market, and is expected to grow at 22.1% annually by value over the next five years, according to iResearch. Furthermore, the Chinese premium used car segment contributed approximately 33.9% of used car transactions by value in 2017, according to iResearch.

 

Attractive and significant technology component of business

Kaixin’s unique data-driven SaaS platform employs advanced data analytics and artificial intelligence, or AI, to drive sales and growth. Kaixin collects over 20 million data points on used vehicles each day, including car make, model, pricing and sales data, which are analyzed and made accessible to its Dealerships. Kaixin’s SaaS system enables Dealerships and Kaixin Affiliated Network Dealers to use a “one click” service to easily submit cars in inventory to multiple online automotive platforms. This unique technology is the key enabler of functionalities across Kaixin’s entire product suite, including its website, mobile app and social media landing pages, and plays a key part in helping dealers optimize their financial performance.

 

Multiple means of earning revenues and profits

Kaixin has partnered with leading financial and insurance institutions to offer consumer, financing and insurance products to prospective customers through its own Dealerships, the Kaixin Affiliated Network Dealer network and other in-network dealers. Kaixin’s after-sales service centers provide a full-suite of inspection, repair and reconditioning and value-added services to both existing and future customers. These high margin subscription-like businesses offered through Kaixin’s service center and other centers it plans to open further strengthen Kaixin’s brand awareness and increase customer loyalty to drive long-term, sustainable profitability.

 

Talented and experienced board and management team with strong internet expertise and deep passion for the automotive business

Kaixin’s board and management teams have strong backgrounds in the internet and automotive retail industries. Together with its partners who remain as part owners of its Dealerships, Kaixin’s operational team of owners and employees have similar goals and visions to establish it as the leader in the premium used car dealership space in China. On average, Kaixin’s Dealership operators have over ten years of experience in the used car industry.

 

CM Seven Star’s management and board of directors also considered certain negative factors in reaching its final decision, including:

 

·Access to capital

Kaixin’s future business expansion and projected financials are dependent on Kaixin’s ability to obtain adequate capital. The board believed that Kaixin would be able to raise the additional capitl either through funds remaining in trus at the closing o fthe business combination or other sources.

 

·Business model

Kaixin’s business model has only limited historical operational data available to provide support and analysis for its high growth potential of the innovative business model.

 

·Comparable peer performance

The stock of Uxin, a US listed PRC company that operates in same sector as Kaixin, had not been performing well at the time of the board’s decision. The board believes that Kaixin’s business model is substantially distinguishable from that of Uxin because, while Uxin takes credit risk, Kaixin does not.

 

Market sentiment

Uncertainty over a US-China trade war and the potential negative impat on investors’ sentiment of US listed PRC companies.

 

·Foreign exchange

The combined company would be subject to foreign exchange risk in connection with its operating results since its operating currency was the RMB.

 

Notwithstanding the foregoing negative considerations, CM Seven Star’s board of directors believed that the positive factors outweighed the negative factors and deermined that it should proceed with an acquisition of Kaixin.

 

During several CM Seven Star meetings of our executive team and in on-going consultation with the board of directors, a substantial amount of time was spent evaluating and reviewing Kaixin’s valuation, which the Board determined to be $330 million. This valuation results in the transaction consideration of 33 million shares (which includes 28.3 million shares and 4.7 million shares included in an incentive plan) at a deemed price of $10.00 per share to acquire 100% of the outstanding equity of Kaixin. This number of shares results in the issuance of one CM Seven Star share for approximately 4.85 outstanding Kaixin ordinary shares. If Kaixin management realizes certain projected financial performance targets of revenues and EBITDA, then it would receive up to 19.5 million additional shares (additional $195 million at a deemed price of $10.00 per share). It was determined in consultation with our board and advisors that the best methodology for evaluating the consideration being paid to Kaixin would be to use the market comparable method. Specifically comparing historical or projected implied enterprise valuation (EV), as multiples of EBITDA and revenues, for publicly listed used automobile related businesses that we viewed as similar in scope to Kaixin in November 2018.

 

CM Seven Star began its analysis by evaluating approximately 44 US-listed technology companies. However, these companies’ businesses spanned across many different sectors, and Kaixin’s comparison to certain larger companies, such as Alibaba and Baidu, was more remote given the high valuation multiples of such companies. Therefore, CM Seven Star focused on the selection criteria of sector, business location, business operation and projected future revenue growth from 2018 to 2020 and determined that Uxin Limited was the most direct comparable company due to the same sector focus and location of business operations and similar growth trends (however, with limited similarity in business models). CM Seven Star’s board of directors also reviewed two companies with US-based operations with a similar business model, namely CarMax Inc. and Carvana Co.

 

Because Kaixin, Uxin and Carvana are all projected to have negative net income in 2019 but with high revenue growth, the board of directors decided to use EV/Sales multiples for comparison purpose in 2019. Based on projections, Kaixin is projected to have a positive adjusted EBITDA in 2019 and Uxin and Carvana are expected to have a positive adjusted EBITDA in 2020. The table below set forth the comparison of EV/Sales and EV/EBITDA for Kaixin as of November 2, 2018 and the three other companies in the peer group, assuming a price of $10.00 per share for the combined company and that the earnout trgets for the applicable periods have been met.

 

   EV/Sales   EV/EBITDA   18E-20E 
   2019E   2020E   2019E   2020E   Sales CAGR 
Uxin   2.4x   1.5x   N.M.    7.4x   63.6%
Carvana   2.1x   1.4x   N.M.    51.5x   67.3%
CarMax   1.4x   1.3x   19.1x   18.1x   6.4%
Peer Avg.   2.0x   1.4x   19.1x   25.6x   45.8%
                          
Kaixin   0.8x   0.7x   15.6x   8.0x   56.0%

 

Source: Capital IQ

 

EBITDA multiples. EV/EBITDA multiples (enterprise value to EBITDA) of similar publicly listed companies were compared to Kaixin’s multiples pre-transaction. The similar public companies traded at approximately 19.1x and 25.6x Projected 2019 and 2020 EV/EBITDA multiples, respectively. These were significant and attractive premiums to the consideration being paid (including earnout shares) in the Kaixin transaction of 15.7x and 8.0x Kaixin’s Projected 2019 and 2020 Projected EV/Earnout EBITDA, respectively (“Earnout EBITDA” assumes the maximum earnout financial targets are realized and all eligible earnout shares are released).

 

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Revenue multiples. EV/Revenue multiples (enterprise value to revenues) of similar publicly listed companies were compared to Kaixin’s multiples pre-transaction. The similar public companies traded at approximately 2.0x and 1.4x Projected 2019 and 2020 EV/revenue multiples, respectively. These were significant and attractive premiums to the consideration being paid (including earnout shares) in the Kaixin transaction of 0.8x and 0.7x Kaixin’s Projected 2019 and 2020 Projected EV/Earnout revenues, respectively (“Earnout revenues” assumes the maximum earnout financial targets are realized and all eligible earnout shares are released).

 

Based on the foregoing, Kaixin’s 2019E and 2020E EV/Sales multiples represent a discount when compared to that of the selected peers’ average. Looking at 2020E EV/EBITDA, Kaixin’s ratio is slightly higher than that of Uxin, but much lower than the ratios of CarMax and Carvana. Uxin’s stock price was at $5.98/share as of the date of the comparable analysis, representing an approximately 33.6% discount from its IPO price of $9.00/share at the end of June 2018. Based on the comparable company analysis result above, CM Seven Star’s board of directors believes that the consideration of the Company is fair and reasonable when comparing with its publicly listed peers in the US exchange market.

 

Our executive team and the board consulted with EarlyBirdCapital about the consideration being paid to acquire Kaixin and about the strength of the company on an EV/Earnout EBITDA and EV/Earnout Revenues valuation basis and growth basis, in comparison to the publicly listed similar businesses reviewed.

  

Kaixin’s projected Earnout Revenue and Earnout EBITDA are forward-looking statements, which are subject to risks as described under “Forward-Looking Statements.”

 

Other Considerations

 

The board of directors focused its analysis on whether the Business Combination is likely to generate a return for its stockholders that is greater than if the trust were to be liquidated. Our board of directors unanimously concluded that the Share Exchange Agreement with Kaixin is in the best interests of the CM Seven Star stockholders. The board of directors did not obtain a fairness opinion on which to base its assessment. Because of the financial skills and background of its members, the board of directors believes it was qualified to perform the analysis discussed in this section.

 

Recommendation of CM Seven Star’s Board of Directors

 

After careful consideration, CM Seven Star’s board of directors determined that the Business Combination with Kaixin is in the best interests of CM Seven Star and its shareholders. On the basis of the foregoing, CM Seven Star’s Board has approved and declared advisable the Business Combination with Kaixin and recommends that you vote or give instructions to vote “FOR” each of the Business Combination Proposal and the other proposals.

 

The board of directors recommends a vote “FOR” each of the Business Combination Proposal and the other proposals — CM Seven Star’s board of directors have interests that may be different from, or in addition to your interests as a shareholder. See “The Business Combination Proposal — Interests of Certain Persons in the Acquisition” in this proxy statement for further information.

 

Interests of Certain Persons in the Business Combination

 

When you consider the recommendation of the board of directors in favor of adoption of the Business Combination Proposal and other proposals, you should keep in mind that the directors and officers of CM Seven Star have interests in the Business Combination that are different from, or in addition to, your interests as a stockholder, including:

 

  In the absence of stockholder approval for a further extension, if the proposed Business Combination is not completed by January 30, 2019, CM Seven Star will be forced to liquidate. In such event, the 5,159,073 shares of CM Seven Star common stock held by CM Seven Star officers, directors and affiliates, which were acquired prior to the IPO for an aggregate purchase price of $25,000, will be worthless, as will the 527,726 private units that were acquired simultaneously in connection with the IPO for an aggregate purchase price of $5,277,260. Each of CM Seven Star’s officers and directors has a pecuniary interest in, as specified in the following table:

 

Name  Shares (not including shares underlying units) in which such person has
a pecuniary interest
  Units in which such person has a
pecuniary interest
Shareholder Value Fund(1)  4,559,073  527,726
Stephen N Cannon  200,000  0
Michele Smith  50,000  0
Jiong Shao  50,000  0

(1) Anthony Ho is a director of Shareholder Value Fund. 

 

In addition, since February 17, 2018, Sing Wang has been the CEO and Director of CM Seven Star pursuant to his agreements with CM Asset Management Company (“CMAM”), the manager of Shareholder Value Fund (“SVF”), the sponsor of CM Seven Star. Pursuant to those Agreements, Mr Wang is entitled to share part of the gain arising from the carried interests that CMAM has in SVF.  Mr Wang’s share is 30% of the gain.

 

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Such shares of common stock and units had an aggregate market value of approximately $[   ] based on the last sale price of CM Seven Star’s common stock of $[   ] and CM Seven Star’s warrants of $[   ], on the Nasdaq Capital Market as of the Record Date;

 

As a result, the financial interest of CM Seven Star’s officers, directors and Initial Stockholders or their affiliates could influence its officers’ and directors’ motivation in selecting Kaixin as a target and therefore there may be a conflict of interest when it determined that the Business Combination is in the stockholders’ best interest; and

 

Unless CM Seven Star consummates the Business Combination, its officers, directors and initial shareholders will not receive reimbursement for any out-of-pocket expenses incurred by them to the extent that such expenses exceeded the amount of its working capital. As a result, the financial interest of CM Seven Star’s officers, directors and initial shareholders or their affiliates could influence its officers’ and directors’ motivation in selecting Kaixin as a target and therefore there may be a conflict of interest when it determined that the Business Combination is in the shareholders’ best interest.

 

The exercise of CM Seven Star’s directors’ and officers’ discretion in agreeing to changes or waivers in the terms of the transaction may result in a conflict of interest when determining whether such changes or waivers are appropriate and in our shareholders’ best interest.

 

If the Business Combination with Kaixin is completed, Kaixin will designate four members to the Board of Directors of CM Seven Star.

 

Anticipated Accounting Treatment

 

The Business Combination will be treated by CM Seven Star as a reverse Business Combination under the acquisition method of accounting in accordance with GAAP. For accounting purposes, Kaixin is considered to be acquiring CM Seven Star in this transaction. Therefore, the aggregate consideration paid in connection with the Business Combination will be allocated to CM Seven Star tangible and intangible assets and liabilities based on their fair market values. The assets and liabilities and results of operations of CM Seven Star will be consolidated into the results of operations of Kaixin as of the completion of the Business Combination.

 

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Regulatory Approvals

 

The Business Combination and the other transactions contemplated by the Share Exchange Agreement are not subject to any additional federal or state regulatory requirements or approvals, including the Hart-Scott Rodino Antitrust Improvements Act of 1976.

 

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THE SHARE EXCHANGE AGREEMENT

 

The following is a summary of the material provisions of the Share Exchange Agreement, a copy of which is attached as Annex A to this proxy statement. You are encouraged to read the Share Exchange Agreement in its entirety for a more complete description of the terms and conditions of the Acquisition.

 

Business Combination with Kaixin; Acquisition Consideration

 

Upon the closing of the transactions contemplated in the Share Exchange Agreement, CM Seven Star will acquire 100% of the issued and outstanding securities of Kaixin, in exchange for approximately 28.3 million ordinary shares of CM Seven Star, or one CM Seven Star share for approximately 4.85 outstanding shares of Kaixin. An additional 4.7 million shares million shares of CM Seven Star will be issued at closing in exchange for currently outstanding options in Kaixin or reserved for issuance under an equity incentive plan. Additionally, 19.5 million earnout shares are to be issued and held in escrow. The Seller may be entitled to receive earnout shares as follows: (1) if the Company’s gross revenue for the year ended December 31, 2019 is greater than or equal to RMB 5,000,000,000, the Seller is entitled to receive 1,950,000 ordinary shares of CM Seven Star; (2) if the Company’s adjusted EBITDA for the year ended December 31, 2019 is greater than or equal to RMB 150,000,000, the Seller is entitled to receive 3,900,000 ordinary shares of CM Seven Star, increasing proportionally to 7,800,000 ordinary shares if Company’s adjusted EBITDA is greater than or equal to RMB 200,000,000; and (3) if the Company’s adjusted EBITDA for the year ended December 31, 2020 is greater than or equal to RMB 340,000,000, the Seller is entitled to receive 4,875,000 ordinary shares of CM Seven Star, increasing proportionally to 9,750,000 ordinary shares if the Company’s adjusted EBITDA is greater than or equal to RMB 480,000,000.

 

Notwithstanding the Revenue and Adjusted EBITDA achieved by the post-transaction company for any period, Renren will receive the 2019 earnout shares if the stock price of CM Seven Star is higher than $13.00 for any sixty days in any period of ninety consecutive trading days during an fifteen month period following the closing, and will receive the 2019 earnout shares and the 2020 earnout shares if the stock price of CM Seven Star is higher than $13.50 for any sixty days in any period of ninety consecutive trading days during a thirty month period following the closing.

 

We refer to this transaction as the “Business Combination.”

 

Representations and Warranties

 

In the Share Exchange Agreement, Kaixin and Renren make certain representations and warranties (with certain exceptions set forth in the disclosure schedule to the Agreement) relating to, among other things: (a) proper corporate organization of Kaixin and its subsidiaries and other companies in which it is a minority shareholder and similar corporate matters; (b) authorization, execution, delivery and enforceability of the Agreement and other transaction documents; (c) absence of conflicts; (d) capital structure and title to units; (e) accuracy of charter documents and corporate records; (f) related-party transactions; (g) required consents and approvals; (h) financial information; (i) absence of certain changes or events; (j) title to assets and properties; (k) material contracts; (l) insurance; (m) licenses and permits; (n) compliance with laws, including those relating to foreign corrupt practices and money laundering; (o) ownership of intellectual property; (p) absence of warranty claims; (q) employment and labor matters; (r) taxes and audits; (s) environmental matters; (t) brokers and finders; (u) investment representations and transfer restrictions; (v) that Kaixin is not an investment company; and (w) other customary representations and warranties.

 

In the Share Exchange Agreement, CM Seven Star makes certain representations and warranties relating to, among other things: (a) title to shares; (b) proper corporate organization and similar corporate matters; (c) authorization, execution, delivery and enforceability of the Agreement and other transaction documents; (d) brokers and finders; (e) capital structure; (f) validity of share issuance; (g) minimum trust fund amount; and (g) validity of Nasdaq Stock Market listing; and (h) SEC filing requirements.

 

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Conduct Prior to Closing; Covenants

 

Kaixin has agreed to operate the business in the ordinary course, consistent with past practices, prior to the closing of the Acquisition (with certain exceptions) and not to take certain specified actions without the prior written consent of CM Seven Star.

 

The Agreement also contains covenants providing for:

 

Each party providing access to their books and records and providing information relating their respective business to the other party, its counsel and other representatives;

 

Kaixin to deliver the financial statements required by CM Seven Star to make applicable filings with the SEC;

 

Cooperate in making certain filings with the SEC; and

 

  Kaixin agreement to pay a portion of the amount paid by CM Seven Seven Star to extend its life, if applicable.

  

Conditions to Closing

 

General Conditions

 

Consummation of the Share Exchange Agreement and the acquisition is conditioned on, among other things, (i) the absence of any order, stay, judgment or decree by any government agency making the Acquisition illegal or otherwise preventing the Acquisition; (ii) CM Seven Star receiving approval from its shareholders to the Acquisition, and (iii) CM Seven Star having in excess of $5 million in tangible assets upon closing of the Acquisition (not including any amounts contributed by the Company or the Seller or by investors or financing introduced or procured by the Company or the Seller).

 

Kaixin and the Seller’s Conditions to Closing

 

The obligations of the Seller and Kaixin to consummate the transactions contemplated by the Share Exchange Agreement, in addition to the conditions described above, are conditioned upon each of the following, among other things:

 

CM Seven Star complying with all of its obligations under the Share Exchange Agreement;

 

the representations and warranties of CM Seven Star being true on and as of the closing date of the Acquisition;

 

Kaixin receiving a legal opinion from CM Seven Star’s counsel in the Cayman Islands; and

 

there having been no material adverse effect to Kaixin’s business;

 

CM Seven Star’s Conditions to Closing

 

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The obligations of CM Seven Star to consummate the transactions contemplated by the Share Exchange Agreement, in addition to the conditions described above in the first paragraph of this section, are conditioned upon each of the following, among other things:

 

Kaixin complying with all of its obligations under the Share Exchange Agreement;

 

the representations and warranties of Kaixin being true on and as of the closing date of the acquisition and Kaixin complying with all required covenants in the Share Exchange Agreement;

 

there having been no material adverse effect to Cm Seven Star’s business;

 

CM Seven Star receiving a legal opinion from Kaixin’s counsel in the PRC and Cayman Islands;

 

the forfeiture by the Seller of all loans listed on the relevant disclosure schedule made to Kaixin or its subsidiaries; and

 

Kaixin selling one of its subsidiaries to an affiliate of the Seller.

 

Termination

 

The Share Exchange Agreement may be terminated and/or abandoned at any time prior to the closing, whether before or after approval of the proposals being presented to CM Seven Star’s shareholders, by:

 

Either CM Seven Star or Kaixin if the closing has not occurred by April 25, 2019;

 

Either CM Seven Star or Kaixin, if Kaixin or any of its stockholders has materially breached any representation, warranty, agreement or covenant contained in the Share Exchange Agreement and such breach has not been cured within thirty (30) days following the receipt by Kaixin or any of its stockholders, as applicable, of Kaixin’s written notice describing such breach; or

 

Kaixin, if CM Seven Star has materially breached any representation, warranty, agreement or covenant contained in the Agreement and such breach has not been cured within thirty (30) days following the receipt by CM Seven Star of Kaixin’s written notice describing such breach.

 

Effect of Termination

 

In the event of termination and abandonment by either CM Seven Star or Kaixin, all further obligations of the parties shall terminate.

 

Indemnification

 

Until the one year anniversary of the date of the Agreement, Seller agreed, to indemnify CM Seven Star and its affiliates from any damages arising from (a) any breach of any representation, warranty or covenant made by the Representing Parties, (b) taxes payable to PRC tax authorities reflected in the Kaixin’s audited financial statements as of and for the year ended December, 31 2018 in relation to the Kaixin’s used auto sales business resulting from a materially different tax treatment as compared to the corresponding tax treatment reflected in Kaixin’s audited financial statements as of and for the year ended December, 31 2017, or (c) obligations incurred by CM Seven Star relating to any contingent consideration due and owing to the Kaixin’s dealer partners and after care partners Other than in respect to fraud claims and claims brought under (b) and (c) above, the indemnification applies only to amounts (in aggregate) in excess of $3 million, and the indemnification obligations are capped at the value of 13,055,000 shares that are being held in escrow. Such indemnification can be satisfied with the cancellation of CM Seven Star ordinary shares.

 

The foregoing summary of the Share Exchange Agreement does not purport to be complete and is qualified in its entirety by reference to the actual agreement, which is filed as Annex A hereto.

 

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Escrow Agreement

 

In connection with the Acquisition, CM Seven Star, the Seller and an escrow agent, will enter into an Escrow Agreement, pursuant to which CM Seven Star shall deposit 22.8 million of its ordinary shares as earnout shares and to secure the indemnification obligations of the Seller as contemplated by the Share Exchange Agreement.

 

Investor Rights Agreement

 

In connection with the Acquisition, CM Seven Star and the Seller will enter into an Investor Rights Agreement with respect to certain lock-up arrangements in respect of the Seller, registration rights granted by CM Seven Star in favor of the Seller, certain voting arrangements relating to CM Seven Star and the issuance of options to certain holders of options under Kaixin’s 2018 Equity Incentive Plan pursuant to such Investor Rights Agreement.

 

Transitional Agreements

 

In connection with the Acquisition, CM Seven Star and the Seller will enter into a Master Transitional Agreement, Transitional Non-Competition Agreement and Transitional Services Agreement (the “Transitional Agreements”), pursuant to which the Seller will agree to provide certain transitional services in connection with the Acquisition.

 

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THE AUTHORIZED SHARE INCREASE PROPOSAL

 

Purpose of the Amendment Proposal

 

In connection with the transactions contemplated by the Share Exchange Agreement, CM Seven Star and Kaixin have agreed that post-closing, CM Seven Star amend its Amended and Restated Memorandum and Articles, which will reflect an increase in its authorized ordinary shares and the removal the class of preferred shares.

 

Comparison of Amended and Restated Memorandum of Association and the proposed Second Amended and Restated Memorandum of Association in Connection with the Authorized Share Increase Proposal

 

The following table sets forth a summary of the change proposed to be made between our Amended and Restated Memorandum of Association and the proposed Second Amended and Restated Memorandum of Association if the Authorized Stock Proposal is approved. This summary is qualified by reference to the complete text of the proposed Second Amended and Restated Memorandum of Association, a copy of which is attached to this proxy statement as Annex D. All stockholders are encouraged to read the proposed Second Amended and Restated Memorandum of Association in its entirety for a more complete description of its terms.

 

Share Capital

Clause 5

 

The share capital of the Company is US$20,200 divided into 200,000,000 ordinary shares of a par value of US$0.0001 each and 2,000,000 preferred shares of a par value of US$0.0001 each.

 

Clause 7

 

The authorised share capital of the Company is US$[●] made up of [●] shares divided into [●] Ordinary Shares of a par value of US$0.0001 each.

 

 

We do not have any arrangements, commitments or understandings to issue any shares of our capital stock except in connection with the Business Combination, the 2018 Equity Incentive Plan and our currently outstanding warrants.

 

While it may be deemed to have potential anti-takeover effects, this proposal to increase our authorized common stock and preferred stock is not prompted by any specific effort or takeover threat currently perceived by management.

 

Required Vote

 

Approval of the Authorized Share Increase Proposal requires the affirmative vote of two-thirds of the issued and outstanding ordinary shares present and entitled to vote at the extraordinary general meeting.

 

Board Recommendation

 

The board of directors recommends a vote “FOR” adoption of the Authorized Share Increase Proposal.

 

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THE AMENDMENT PROPOSAL

 

Purpose of the Amendment Proposal

 

In connection with the transactions contemplated by the Share Exchange Agreement, CM Seven Star and Kaixin have agreed that post-closing, CM Seven Star amend its Amended and Restated Memorandum and Articles to better reflect our ongoing operations subsequent to completion of the Business Combination, including to:

 

Update references to the Companies Law to the latest revision;

 

Include a provision noting the restriction against licensed activities by the Company;

 

Include a provision regarding enterprises prohibited by the Companies Law in relation to the Company;

 

Update the authorised share capital of the Company.

 

Amend certain existing definitions, include new definitions, and delete certain definitions relevant to a business combination and to preferred shares which are no longer applicable;

 

Make various housekeeping amendments to the interpretation provisions;

 

Amend the provisions regarding the issue of shares;

 

Include new provisions setting out the rights and restrictions attaching to the ordinary shares of the Company relevant to, among other things, redemption and repurchase of the ordinary shares, creation of new share classes, winding up of the Company, payment and declaration of dividends, mergers and consolidations, appointment and removal of auditors, directors and officers of the Company, related party transactions, and amendment of the memorandum and articles of association of the Company;

 

Amend certain terms relating to the transfer of shares;

 

Amend the provisions relating to the redemption, repurchase and surrender of shares;

 

Amend certain terms relating to the variation of rights of shares;

 

Amend the provisions relating to the alteration of share capital, to delete provisions relating to conversion of shares into stock and reconversion of stock into shares and to remove the proviso relevant to a business combination;

 

Amend certain terms relating to general meetings by requiring a special resolution for proposals brought by requisitionists and to delete certain provisions relevant to the procedure for nomination of directors by members at annual general meetings;

 

Amend the notice period in relation to general meetings;

 

Amend the provisions in relation to proceedings at general meeting relevant to business which may be transacted without a quorum, participation in meetings by telephone and other means, the quorum and adjournment requirements, and procedures for voting on resolutions;

 

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Amend the provisions in relation to voting at general meetings by deleting provisions relevant to the procedures for objections to qualification of voters, for appointing multiple proxies and for abstaining, voting for and/or against resolutions by concurrent voting of shares in more than one way;

 

Amend the general provisions relating to the composition of the board of directors, the appointment and removal of directors;

 

Update the provisions relating to the remuneration of directors by deleting the condition that no remuneration be paid prior to the consummation of a business combination;

 

Include provisions for the appointment of alternate directors;

 

Delete the provision enabling the removal of a director by the other directors;

 

Amend certain terms relating to the proceedings of directors relevant to who may call a meeting of directors and the notice and quorum requirements for such meetings;

 

Include a provision regarding the validity of a directors’ meeting once the chairman signs the minutes;

 

Include a provision that dividends may also be declared by the shareholders;

 

Remove references to the audit committee;

 

Amend the provisions relating to the capitalisation of profits;

 

Amend the provisions relating to the service and delivery of notices;

 

Include provisions governing the disclosure of information on the Company to shareholders;

 

Amend the provisions relating to indemnity of Company officers and directors;

 

Amend the provisions relating to the shareholder approval required for distribution of the assets upon a winding up of the Company by a liquidator;

 

Amend the requirements relevant to amending the Company’s memorandum and articles of association and change of the Company’s name;

 

Amend the provisions relating to the shareholder approval required to transfer the Company by continuation to another jurisdiction;

 

Delete provisions relating to mergers and consolidations;

 

Delete provisions relating to business combination;

 

Delete provisions relating to certain tax filings; and

 

Include a provision relating to disclosure of information on the Company to regulatory authorities.

 

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Comparison of Current Amended and Restated Memorandum and Articles of Association to Proposed Second Amended and Restated Memorandum and Articles of Association, in Connection with this Amendment Proposal

 

The following table sets forth a summary of the additional material differences between our Current Amended and Restated Memorandum and Articles of Association and the proposed Second Amended and Restated Memorandum and Articles of Association relating to this Amendment Proposal, a copy of which is attached to this proxy statement/prospectus as Annex E. We urge all stockholders to read the Proposed Second Amended and Restated Memorandum and Articles of Association in its entirety for a more complete description of its terms.

 

1. Current Amended and Restated Memorandum of Association Proposed Second Amended and Restated Memorandum of Association
Title Amended and Restated Memorandum of Association Second Amended and Restated Memorandum of Association
Companies Law Companies Law (2016 Revision) Companies Law (2018 Revision)
Restriction against licensed activities No applicable language

Clause 4

 

Nothing in this Memorandum of Association shall permit the Company to carry on a business for which a license is required under the laws of the Cayman Islands unless duly licensed.

 

Prohibited Enterprises No applicable language

Clause 5

 

The Company shall not trade in the Cayman Islands with any person, firm or corporation except in furtherance of the business of the Company carried on outside the Cayman Islands; provided that nothing in this clause shall be construed as to prevent the Company effecting and concluding contracts in the Cayman Islands, and exercising in the Cayman Islands all of its powers necessary for the carrying on of its business outside the Cayman Islands.

 

     
2. Current Amended and Restated Articles of Association Proposed Second Amended and Restated Articles of Association
Title Amended and Restated Articles of Association Second Amended and Restated Articles of Association
Interpretation

Article 1

 

The following existing definitions have been amended as set out in the adjacent column:

 

Article 1

 

The following new or amended definitions have been inserted as follows:

 

ADS” an American Depositary Share representing Ordinary Shares;  

 

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Affiliate” with respect to any specified Person, any other Person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control, with such specified Person; For purposes of these Articles, except as otherwise expressly provided herein, when used with respect to any Person, “control” means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms “affiliated”, “controlling” and “controlled” have meanings correlative to the foregoing;

 

applicable law” includes the Law and Statutes, the rules and regulations of the Designated Stock Exchange, and any rules and regulations of the United States Securities and Exchange Commission that may apply to the Company by virtue of its trading on the Designated Stock Exchange, or of any other jurisdiction in which the Company is offering securities;

  business day” means any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions or trust companies are authorised or obligated by law to close in New York City. Business Day” a day (excluding Saturdays or Sundays), on which banks in Hong Kong, Beijing, Shanghai and New York are open for general banking business throughout their normal business hours;
   

capital” the share capital from time to time of the Company;

 

Chairman” the chairman of the Board of Directors;

 

Change of Control Event” with respect to a Person, the occurrence of any of the following, whether in a single transaction or in a series of related transactions: (A) an amalgamation, arrangement, merger, consolidation, scheme of arrangement or similar transaction (i) in which such Person is not the surviving entity, except for a transaction the principal purpose of which is to change the jurisdiction in which such Person is incorporated or (ii) as result of which the holders of the voting securities of such Person do not hold more than 50% of the combined voting power of the voting securities of the surviving entity, or (B) sale, transfer or other disposition of all or substantially all of the assets of such Person (including without limitation in a liquidation, dissolution or similar proceeding);

 

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Company’s website” the website of the Company, the address or domain name of which has been notified to Members;

 

debenture” and “debenture holder” a debenture and debenture holder(s) respectively, as those terms are defined in the rules of the Designated Stock Exchange;

 

Commission” Securities and Exchange Commission of the United States of America or any other federal agency for the time being administering the Securities Act;

 

Companies Law” and “Law” the Companies Law (2018 Revision) of the Cayman Islands and any statutory amendment or re-enactment thereof. Where any provision of the Companies Law is referred to, the reference is to that provision as amended by any law for the time being in force;

 

Effective Date” the date of the closing of the Company’s acquisition of Kaixin Auto Group, pursuant to the Exchange Agreement

 

electronic” the meaning given to it in the Electronic Transactions Law (2003 Revision) of the Cayman Islands and any amendment thereto or re-enactments thereof for the time being in force;

 

electronic communication” electronic posting to the Company’s Website, transmission to any number, address or internet website or other electronic delivery methods as otherwise decided and approved by not less than two-thirds of the vote of the Board;

 

Exchange Agreement” that certain share exchange agreement dated November 2, 2018; among the Company, Renren and Kaixin Auto Group

 

Foreign Private Issuer” a “foreign private issuer” as defined in Rule 3b-4 under the Securities Exchange Act; 

 

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in writing” includes writing, printing, lithograph, photograph, type-writing and every other mode of representing words or figures in a legible and non-transitory form and, only where used in connection with a notice served by the Company on Members or other persons entitled to receive notices hereunder, shall also include a record maintained in an electronic medium which is accessible in visible form so as to be useable for subsequent reference;

 

month” a calendar month;

  Ordinary Resolution” means: (a) a resolution passed by a simple majority of the Members as, being entitled to do so, vote in person or, where proxies are allowed, by proxy at a general meeting; or (b) a resolution in writing (in one or more counterparts) signed by a simple majority of the Members entitled to vote at a general meeting. In computing the majority when a poll is demanded, regard shall be had to the number of votes to which each Member is entitled by the Articles.

Ordinary Resolution” a resolution:

 

(a)       passed by a simple majority of votes cast by such Members as, being entitled to do so, vote in person or, in the case of any Member being an organization, by its duly authorised representative or, where proxies are allowed, by proxy at a general meeting of the Company; or

 

(b)       approved in writing by all of the Members entitled to vote at a general meeting of the Company in one or more instruments each signed by one or more of the Members and the effective date of the resolution so adopted shall be the date on which the instrument, or the last of such instruments if more than one, is executed;

 

   

paid up” paid up as to the par value and any premium payable in respect of the issue of any shares and includes credited as paid up;

 

Percentage Ownership” with respect to a Person’s ownership in another Person, the lesser of (a) the voting rights that such Person directly or indirectly holds in such other Person as a percentage of all of the outstanding voting rights in such other Person and (b) the equity interests that such Person directly or indirectly (through wholly-owned subsidiaries) holds in such other Person as a percentage of all of the outstanding equity interests in such other Person;

 

Person” any natural person, firm, company, joint venture, partnership, corporation, association or other entity (whether or not having a separate legal personality) or any of them as the context so requires;

 

 

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Renren” Renren Inc., a company incorporated under the laws of the Cayman Islands;

 

Renren Base Holding” [☐] Ordinary Shares

 

Renren Parties” as of the time specified or, if no time is specified, from time to time, collectively (i) Renren and (ii) each Affiliate of Renren whose financial statements are required under generally accepted accounting principles to be reported by Renren on a consolidated basis;

 

secretary” the person appointed as company secretary by the Board from time to time;

 

Securities Act

 

the Securities Act of 1933 of the United States of America, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time;

 

Securities Exchange Act” the Securities Exchange Act of 1934 of the United States of America, as amended, or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time;

 

  Share” means an Ordinary Share or a Preferred Share and includes a fraction of a share in the Company. share” any share in the capital of the Company, without regard to class and includes a fraction of a share;
  Special Resolution” has the same meaning as in the Statute, and includes a unanimous written resolution. Special Resolution” a resolution passed at a general meeting (or, if so specified, a meeting of Members holding a class of shares) of the Company by a majority of not less than two-thirds (2/3) of the votes cast (save that with respect to the matters referred to in Article 9(d)(ii)(a), (b) and (g) in respect of the Company, the resolution shall be passed by a majority of not less than two-thirds (2/3) of the votes cast which must include the affirmative vote of Renren), or a written resolution passed by unanimous consent of all Members entitled to vote.
  Sponsor” means Shareholder Value Fund, a Cayman Islands exempted company. SVF” Shareholder Value Fund, a company incorporated under the laws of the Cayman Islands;

 

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Subsidiaries” with respect to any Person, any or all corporations, partnerships, limited liability companies, joint ventures, associations and other entities controlled by such person directly or indirectly through one or more intermediaries;

 

Transfer” any sale, transfer or other disposition, whether or not for value;

   

United States Dollars,” or “US$” dollars, the legal currency of the United States of America; and

 

year” a calendar year.

Issue of Shares

Article 3

 

3.1       Subject to the provisions, if any, in the Memorandum (and to any direction that may be given by the Company in general meeting) and, where applicable, the rules of the Designated Stock Exchange and/or any competent regulatory authority, and without prejudice to any rights attached to any existing Shares, the Directors may allot, issue, grant options over or otherwise dispose of Shares (including fractions of a Share) with or without preferred, deferred or other rights or restrictions, whether in regard to Dividend or other distribution, voting, return of capital or otherwise and to such persons, at such times and on such other terms as they think proper, and may also (subject to the Statute and the Articles) vary such rights. 

 

Articles 6. to 8.

 

6.       Subject to these Articles, all Shares for the time being unissued shall be under the control of the Directors who may, in their absolute discretion and without the approval of the Members, cause the Company to:

 

(a)       issue, allot and dispose of Shares (including, without limitation, preferred shares) (whether in certificated form or non-certificated form) to such Persons, in such manner, on such terms and having such rights and being subject to such restrictions as they may from time to time determine;

 

(b)       grant rights over Shares or other securities to be issued in one or more classes or series as they deem necessary or appropriate and determine the designations, powers, preferences, privileges and other rights attaching to such Shares or securities, including dividend rights, voting rights, conversion rights, terms of redemption and liquidation preferences, any or all of which may be greater than the powers, preferences, privileges and rights associated with the then issued and outstanding Shares, at such times and on such other terms as they think proper; and

 

(c)       grant options with respect to Shares and issue warrants or similar instruments with respect thereto. 

 

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3.2       The Company may issue rights, options, warrants or convertible securities or securities of similar nature conferring the right upon the holders thereof to subscribe for, purchase or receive any class of Shares or other securities in the Company on such terms as the Directors may from time to time determine.

 

3.3       The Company may issue units of securities in the Company, which may be comprised of whole or fractional Shares, rights, options, warrants or convertible securities or securities of similar nature conferring the right upon the holders thereof to subscribe for, purchase or receive any class of Shares or other securities in the Company, upon such terms as the Directors may from time to time determine. The securities comprising any such units which are issued pursuant to the IPO can only be traded separately from one another on the 90th day following the date of the prospectus relating to the IPO unless the representative of the Underwriters in the IPO determines that an earlier date is acceptable, subject to the Company having filed a current report on Form 8-K with the SEC and a press release announcing when such separate trading will begin. Prior to such date, the units can be traded, but the securities comprising such units cannot be traded separately from one another.

 

3.4       The Company shall not issue Shares to bearer.

 

7.       The Directors may provide, out of the unissued shares, for series of preferred shares. Before any preferred shares of any such series are issued, the Directors shall fix, by resolution or resolutions, the following provisions of the preferred shares thereof:

 

(a)       the designation of such series, the number of preferred shares to constitute such series and the subscription price thereof if different from the par value thereof;

 

(b)       whether the preferred shares of such series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights, which may be general or limited;

 

(c)       the dividends, if any, payable on such series, whether any such dividends shall be cumulative, and, if so, from what dates, the conditions and dates upon which such dividends shall be payable, the preference or relation which such dividends shall bear to the dividends payable on any shares of any other class or any other series of preferred shares;

 

(d)       whether the preferred shares of such series shall be subject to redemption by the Company, and, if so, the times, prices and other conditions of such redemption;

 

(e)       the amount or amounts payable upon preferred shares of such series upon, and the rights of the holders of such series in, a voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets, of the Company;

 

(f)       whether the preferred shares of such series shall be subject to the operation of a retirement or sinking fund and, if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the preferred shares of such series for retirement or other corporate purposes and the terms and provisions relative to the operation thereof;

 

(g)       whether the preferred shares of such series shall be convertible into, or exchangeable for, shares of any other class or any other series of preferred shares or any other securities and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion or exchange; 

 

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(h)       the limitations and restrictions, if any, to be effective while any preferred shares of such series are outstanding upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption or other acquisition by the Company of, the existing Shares or shares of any other class of shares or any other series of preferred shares;

 

(i)       the conditions or restrictions, if any, upon the creation of indebtedness of the Company or upon the issue of any additional shares, including additional shares of such series or of any other class of shares or any other series of preferred shares; and

 

(j)       any other powers, preferences and relative, participating, optional and other special rights, and any qualifications, limitations and restrictions thereof.

 

Without limiting the foregoing and subject to the Articles, the voting powers of any series of preferred shares may include the right, in the circumstances specified in the resolution or resolutions providing for the issuance of such preferred shares, to elect one or more Directors who shall serve for such term and have such voting powers as shall be stated in the resolution or resolutions providing for the issuance of such preferred shares.

 

8.       The powers, preferences and relative, participating, optional and other special rights of each series of preferred shares, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. All shares of any one series of preferred shares shall be identical in all respects with all other shares of such series, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be cumulative.

 

Rights and Restrictions Attaching to Ordinary Shares No applicable provisions

Article 9.

 

9.       Each Ordinary Share shall have the same rights, including economic and income rights, in all circumstances. The rights and restrictions attaching to the ordinary shares are as follows:

 

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(a)       Income

 

Holders of Ordinary Shares shall be entitled to such dividends as the Directors may in their absolute discretion lawfully declare from time to time.

 

(b)       Capital

 

Holders of Ordinary Shares shall be entitled to a return of capital on liquidation, dissolution or winding-up of the Company (other than on a conversion, redemption or purchase of shares, or an equity financing or series of financings that do not constitute the sale of all or substantially all of the shares of the Company).

 

(c)       Change of Control Event

 

Each Ordinary Share shall have the same rights upon a Change of Control Event with respect to their rights and interests in the Company, including without limitation receiving the same consideration on a per share basis.

 

(d)       Attendance at General Meetings and Voting

 

Holders of Ordinary Shares have the right to receive notice of, attend, speak and vote at general meetings of the Company. Holders of Ordinary Shares shall at all times vote together as one class on all matters submitted to a vote by Members, and, where a poll is requested, each Ordinary Share shall be entitled to one vote on all matters subject to a vote at general meetings of the Company.

 

Notwithstanding any provision of these Articles to the contrary:

 

(i)       the following matters are subject to the approval by Renren and, for a period of twenty-four (24) months from the Effective Date, SVF:

 

a)       any action that authorizes, creates or issues any securities or class of securities of the Company and its Subsidiaries other than (i) pursuant to a duly adopted equity-based incentive plan of the Company or a Subsidiary approved by the Board in accordance with this Article (excluding, for the avoidance of doubt, the equity incentive plan adopted on the Effective Date in accordance with the terms of the Exchange Agreement);

 

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b)       any establishment of or amendment to any equity-based incentive plan of the Company or any of its Subsidiaries, including any equity appreciation, phantom equity, equity plans or similar rights with respect to the Company or any of its Subsidiaries;

 

c)       the selection of underwriters and the exchange on which any equity interests of the Company (including the Ordinary Shares), or any equity securities of a Subsidiary will be listed,

 

d)       the declaration, set aside, or payment of any scrip dividend on, or other distribution that is deemed to be a dilutive event with respect to, any equity interests of the Company or any of its Subsidiaries;

 

(ii)       the following matters are subject to the approval by Renren for so long as Renren Parties continue to collectively hold at least the Renren Base Holding:

 

a)       election of Director(s) to the Board at an annual general meeting of the Company;

 

b)       any amendment of the Memorandum or the Articles or the constitutional documents of any of the Company’s Subsidiaries, including without limitation any amendment or change of the rights, preferences, privileges or powers, or other terms of, or the restrictions provided for the benefit of any securities of the Company and its Subsidiaries;

 

c)       any action to nominate, appoint, suspend or remove any executive officer or other member of management of the Company and its Subsidiaries, or the adoption of any employment or personnel policies of the Company or its Subsidiaries;

 

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d)       any related party transaction between a member of any the senior management of the Company or its Subsidiaries or any of such management member’s respective Affiliates, on the one hand, and any of the Company or its Subsidiaries, on the other hand, including any amendment or termination of such related party transaction other than pursuant to its terms, other than (i) loans to employees of the Company or its Subsidiaries in an aggregate amount outstanding at any given time not exceeding RMB[☐], so long as the details of such loans are promptly disclosed in writing to Renren; or (ii) transactions that do not exceed US$[☐] in the aggregate in any 12-month period, whether based on payments made or the value of the subject matter of such transactions, so long as such transactions are promptly disclosed in writing to Renren;

 

e)       any Change of Control Event;

 

f)       any acquisition of material assets or any equity interests of any other Person;

 

g)       the liquidation, dissolution or winding-up of the Company or any of its Subsidiaries;

 

h)       the declaration, set aside, or payment of any dividend on, or other distribution with respect to, any equity interests of any the Company or its Subsidiaries (save for scrip dividends and similar dilutive events whereby SVF consent and approval is also required pursuant to Article 9(d)(i));

 

i)       the appointment or removal of the auditors of the Company or any change in accounting policies of the Company or its Subsidiaries;

 

j)       the granting of exclusivity to any third party with respect to any rights, assets or opportunities of, or rights or opportunities to do business with, the Company or its Subsidiaries;

 

k)       the incurrence of any material indebtedness or guarantees, or the grant or creation of any material security interest, mortgage, charge, pledge, lien or other encumbrance on any assets of the Company or its Subsidiaries in connection with the incurrence of such material indebtedness or guarantees (other than transactions involving such incurrences or such grants or creations in connection therewith that, in each case, arise in the ordinary course of business consistent with past practice);

 

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l)       any sale, transfer, disposition, licensing, assignment or pledge of, or grant or creation of any security interest, mortgage, charge, pledge, lien or other encumbrance on, any material assets of the Company or any of its Subsidiaries, including any technology or intellectual property of the Company or any of its Subsidiaries any (other than the non-exclusive licensing of technology or intellectual property in the ordinary course of business consistent with past practice);

 

m)       any purchase or redemption of any equity interests of the Company or its Subsidiaries by the Company or its Subsidiaries other than the repurchases of equity interests of the Company or its Subsidiaries from its employees or consultants pursuant to a duly adopted equity-based incentive plan approved by the Board and approved in accordance with this Article 9(d)(ii) at a price equal to the lower of (i) the fair market value thereof or (ii) the original cost thereof;

 

n)       the formation by Company or its Subsidiaries of any material joint ventures or partnerships (including any material strategic alliances or cooperation arrangements);

 

o)       any material amendments to any contractual arrangements with respect to the ownership, voting rights, economic rights or control of any variable interest entity;

 

p)       any registration by way of continuation as a body corporate under the laws of any jurisdiction outside the Cayman Islands or deregistration in the Cayman Islands;

 

q)       any agreement or commitment to do any of the foregoing; and

 

r)       any delegation of authority in respect of any of the foregoing matters to any committee of the Board or any other person.

 

 

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Transfer of Shares

 

Article 7

 

7.1          Subject to the terms of the Articles, any Member may transfer all or any of his Shares by an instrument of transfer provided that such transfer complies with applicable rules of the SEC and federal and state securities laws of the United States. If the Shares in question were issued in conjunction with rights, options or warrants issued pursuant to Article 3 on terms that one cannot be transferred without the other, the Directors shall refuse to register the transfer of any such Share without evidence satisfactory to them of the like transfer of such option or warrant.

 

7.2          The instrument of transfer of any Share shall be in writing in the usual or common form or in a form prescribed by the Designated Stock Exchange or in any other form approved by the Directors and shall be executed by or on behalf of the transferor (and if the Directors so require, signed by or on behalf of the transferee) and may be under hand or, if the transferor or transferee is a clearing house or its nominee(s), by hand or by machine imprinted signature or by such other manner of execution as the Directors may approve from time to time. The transferor shall be deemed to remain the holder of a Share until the name of the transferee is entered in the Register of Members.

 

Articles 15. to 18.

 

15.          Shares of the Company are transferable; provided that the Board may, in its sole discretion, decline to register any transfer of any share which is not fully paid up or on which the Company has a lien.

 

(a)          The Directors may also decline to register any transfer of any share unless:

 

(i)           the instrument of transfer is lodged with the Company, accompanied by the certificate for the shares to which it relates and such other evidence as the Board may reasonably require to show the right of the transferor to make the transfer;

 

(ii)          the shares to be transferred are free of any lien in favor of the Company;

 

(iii)         the instrument of transfer is in respect of only one Class of Shares;

 

(iv)         the instrument of transfer is properly stamped, if required; and

 

(v)          in the case of a transfer to joint holders, the number of joint holders to whom the Share is to be transferred does not exceed four; a fee of such maximum sum as the Designated Stock Exchange may determine to be payable, or such lesser sum as the Board may from time to time require, is paid to the Company in respect thereof.

 

(b)          If the Directors refuse to register a transfer they shall, within two months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.

 

16.          The registration of transfers may, on 14 days’ notice being given by advertisement in one or more newspapers or by electronic means, be suspended and the register closed at such times and for such periods as the Board may from time to time determine.

 

17.          The instrument of transfer of any share shall be in writing and executed by or on behalf of the transferor (and if the Directors so require, signed by the transferee). Without prejudice to the last preceding Article, the Board may also resolve, either generally or in any particular case, upon request by either the transferor or transferee, to accept mechanically executed transfers. The transferor shall be deemed to remain a holder of the share until the name of the transferee is entered in the Register of Members.

 

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18.          All instruments of transfer registered shall be retained by the Company.

General provisions relating to Redemption, Repurchase and Surrender of Shares

Articles 8 and 48.3

 

8.1          Subject to the provisions of the Statute, and, where applicable, the rules of the Designated Stock Exchange and/or any competent regulatory authority, the Company may issue Shares that are to be redeemed or are liable to be redeemed at the option of the Member or the Company. The redemption of such Shares, except Public Shares, shall be effected in such manner and upon such other terms as the Company may, by Special Resolution, determine before the issue of such Shares. With respect to redeeming or repurchasing the Shares:

 

(a)          Members who hold Public Shares are entitled to request the redemption of such Shares in the circumstances described in Article 48.3;

 

(b)          Shares held by the Founders shall be surrendered by the Founders on a pro rata basis for no consideration to the extent that the Over-Allotment Option is not exercised in full so that the Founders will own 20% of the Company’s issued Shares after the IPO (exclusive of any securities purchased in a private placement simultaneously with the IPO or in the IPO itself); and

 

(c)          Public Shares shall be repurchased by way of tender offer in the circumstances set out in Article 48.2(b).

 

 

Articles 19. to 22.

 

19.          Subject to the provisions of the Statutes and these Articles, the Company may:

 

(a)          issue shares on terms that they are to be redeemed or are liable to be redeemed at the option of the Company or the Member and the redemption of shares shall be effected on such terms and in such manner as the Board may, before the issue of such shares, determine;

 

(b)          purchase its own shares (including any redeemable shares) on such terms and in such manner as have been approved by the Board or by the Members by Ordinary Resolution (provided that no such purchase may be made contrary to the terms or manner recommended by the Board), or are otherwise authorized by these Articles; and

 

(c)          the Company may make a payment in respect of the redemption or purchase of its own shares in any manner permitted by the Statutes, including out of capital.

 

20.          Purchase of shares listed on the Designated Stock Exchange: the Company is authorised to purchase any share listed on the Designated Stock Exchange in accordance with the following manner of purchase:

 

(a)           the maximum number of shares that may be repurchased shall be equal to the number of issued and outstanding shares less one share; and

 

(b)          the repurchase shall be at such time, at such price and on such other terms as determined and agreed by the Board in their sole discretion; provided, however, that:

 

 

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8.2          Subject to the provisions of the Statute, and, where applicable, the rules of the Designated Stock Exchange and/or any competent regulatory authority, the Company may purchase its own Shares (including any redeemable Shares) in such manner and on such other terms as the Directors may agree with the relevant Member. For the avoidance of doubt, redemptions and repurchases of Shares in the circumstances described at Articles 8.1(a), 8.1(b) and 8.1(c) above shall not require further approval of the Members.

 

8.3          The Company may make a payment in respect of the redemption or purchase of its own Shares in any manner permitted by the Statute, including out of capital.

 

8.4          The Directors may accept the surrender for no consideration of any fully paid Share.

 

48.3        Any Member holding Shares issued to persons who are not a Founder, officer of the Company or Director may, contemporaneously with any vote on a Business Combination, elect to have their Public Shares redeemed for cash (the “IPO Redemption”). If so demanded, the Company shall pay any such redeeming Member, regardless of whether he is voting for or against such proposed Business Combination, a per Share redemption price equal to their pro rata share of the Trust Fund (such redemption price being referred to herein as the “Redemption Price”).

(i)           such repurchase transactions shall be in accordance with the relevant code, rules and regulations applicable to the listing of the shares on the Designated Stock Exchange; and

 

(ii)          at the time of the repurchase, the Company is able to pay its debts as they fall due in the ordinary course of its business.

 

20A. Purchase of shares not listed on the Designated Stock Exchange: the Company is authorised to purchase any shares not listed on the Designated Stock Exchange in accordance with the following manner of purchase:

 

(a)          the Company shall serve a repurchase notice in a form approved by the Board on the Member from whom the shares are to be repurchased at least two Business Days prior to the date specified in the notice as being the repurchase date;

 

(b)          the price for the shares being repurchased shall be such price agreed between the Board and the applicable Member;

 

(c)          the date of repurchase shall be the date specified in the repurchase notice; and

 

(d)          the repurchase shall be on such other terms as specified in the repurchase notice as determined and agreed by the Board and the applicable Member in their sole discretion.

 

21.          The redemption or purchase of any share shall not be deemed to give rise to the redemption or purchase of any other share and the Company is not obligated to purchase any other share other than as may be required pursuant to applicable law and any other contractual obligations of the Company.

 

22.          The holder of the shares being purchased shall be bound to deliver up to the Company the certificate(s) (if any) thereof for cancellation and thereupon the Company shall pay to him the purchase or redemption monies or consideration in respect thereof.

 

 

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Variation of the Rights of Shares

Article 10

 

10.1        If at any time the share capital of the Company is divided into different classes of Shares, all or any of the rights attached to any class (unless otherwise provided by the terms of issue of the Shares of that class) may, whether or not the Company is being wound up, be varied without the consent of the holders of the issued Shares of that class where such variation is considered by the Directors not to have a material adverse effect upon such rights; otherwise, any such variation shall be made only with the consent in writing of the holders of not less than two thirds of the issued Shares of that class, or with the approval of a resolution passed by a majority of not less than two thirds of the votes cast at a separate meeting of the holders of the Shares of that class. For the avoidance of doubt, the Directors reserve the right, notwithstanding that any such variation may not have a material adverse effect, to obtain consent from the holders of Shares of the relevant class. To any such meeting all the provisions of the Articles relating to general meetings shall apply mutatis mutandis.

 

10.2        For the purposes of a separate class meeting, the Directors may treat two or more or all the classes of Shares as forming one class of Shares if the Directors consider that such class of Shares would be affected in the same way by the proposals under consideration, but in any other case shall treat them as separate classes of Shares.

 

Articles 23. to 24.

 

23.          If at any time the share capital is divided into different classes or series of shares, the rights attaching to any class or series (unless otherwise provided by the terms of issue of the shares of that class or series) may, subject to these Articles, be varied or abrogated with the consent in writing of the holders of a majority of the issued shares of that class or series or with the sanction of a Special Resolution passed at a general meeting of the holders of the shares of that class or series.

 

24.          The provisions of these Articles relating to general meetings shall apply to every such general meeting of the holders of one class or series of shares except the following:

 

(a)          separate general meetings of the holders of a class or series of shares may be called only by (i) the Chairman of the Board, or (ii) a majority of the entire Board of Directors (unless otherwise specifically provided by the terms of issue of the shares of such class or series). Nothing in this Article 24 shall be deemed to give any Member or Members the right to call a class or series meeting.

 

(b)          the necessary quorum shall be one or more persons holding or representing by proxy at least one-third of the issued shares of the class or series and any holder of shares of the class or series present in person or by proxy may demand a poll.

 

Alteration of Share Capital

Article 17.1

 

Currently this Article provides that the Company may by Ordinary Resolution, make the amendments set forth in Article 17.1 (a) to (e).

 

Article 47.

 

Provides that the Company may, subject to Article 9(d), by Ordinary Resolution make the amendments set forth in Article 47.1 (a) to (d).

 

General Meetings No applicable provision

Article 55.

 

(d)          Any resolutions passed on the extraordinary general meetings convened pursuant to sub-Article (a) above should be by Special Resolutions.