An employee uses a smartphone while standing in front of signage at the Garena Interactive Holding Ltd. headquarters in Singapore, on Thursday, Aug. 25, 2016. Garena, a gaming and e-commerce empire that is now Southeast Asia's largest startup, is a Singapore-based company that's valued at more than $3.75 billion. Photographer: Nicky Loh/Bloomberg
An employee at the Garena headquarters in Singapore. Taiwan is investigating the China ownership of Garena’s parent, which could jeopardise its access to the Taiwan market © Bloomberg

Sea, a Singapore-based online games and ecommerce business that has just wrapped up a $1bn fundraising ahead of a New York listing, is at risk of being ejected from Taiwan, which accounts for almost a third of its revenues.

The group is under investigation in Taiwan over allegations it did not disclose its links to China. The news comes just ahead of its debut in New York, on Friday.

Sea, in which Chinese tech giant Tencent holds a 39.8 per cent stake, earned 29.1 per cent of its revenue during the six months ended June from the Taiwan market via its Shopee online marketplace and Garena gaming platform.

Taiwan’s Investment Commission this week said it had launched an investigation into Shopee. This came after a Taiwan lawyer complained that the Singaporean group violated a requirement that companies with a minimum 30 per cent Chinese ownership be reviewed by the government before they are allowed to operate in Taiwan.

Emile Chang, the executive secretary of the commission, told the Financial Times that the investigation could lead to Shopee being barred from doing business in Taiwan. The commission previously ordered Alibaba and its ecommerce platform Taobao to cease their Taiwan operations in 2015.

“All foreign investments in Taiwan need approval. From this moment it seems that Shopee did not get approval from my office,” Mr Chang said, adding that investigations are ongoing and had yet to expand to include Garena, the games business that nets more than 90 per cent of Sea’s revenues.

Chinese investment is a sensitive issue in Taiwan. In 2014, opposition to the passing of a trade pact between the regions resulted in the occupation of parliament and spurred 500,000 people to take to the streets of Taipei.

Chinese companies with investment from the state are seen as “not purely doing business”, said National Taiwan University economics professor Jang Show-ling. “They are doing business together with some political strategy, that is what we worry about.”

Sea operates in Taiwan via a variable interest entity, a category of business generally based in tax havens and which gives shareholders a cut of revenues without actual ownership rights to the company. Such structures have allowed foreign ownership in Chinese companies including Alibaba, Tencent and Baidu.

Sea declined to comment on the investigation because of its pending listing on the New York Stock Exchange. In its most recent filing to the Securities and Exchange Commission the company, formerly known as Garena, said the allegations about its legality in Taiwan were “without merit” and that the “shareholding structure, including our VIE arrangement and related contracts, comply with Taiwan law”.

However, it added: “We cannot predict the outcome of these inquiries, nor can we predict whether additional allegations or actions will be made or taken by any government authority or by any other persons, including our competitors to interfere with our business or this offering.”

In its prospectus, Sea said if it was deemed to be a Chinese investor, “we would be prohibited from investing in or controlling our Taiwan operating entities”.

Asked whether the use of a VIE structure would mean Sea is legally operating in Taiwan, Mr Chang said he could not yet say, adding that Taiwan’s treatment of VIEs would be a “critical issue” in the commission’s investigation.

The issue of Sea’s Chinese backing is unlikely to disappear after the listing. Tencent told the Financial Times it was interested in participating in the Sea IPO by subscribing up to $100m of shares.

According to Sea’s latest filing to the US Securities and Exchange Commission, Tencent would hold 30 per cent of total voting rights after the offering.

Banks priced the IPO at $15 per share on Thursday, New York time. The level was above the indicated rate of $12-$14 per share, and could see the issuer raise more than $1bn if the full greenshoe option is exercised.

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