Bitcoin mining firm Canaan faces investor suit over $90 million IPO

It was a Chinese company that few US investors had heard of. But late last year, Canaan Creative became the first crypto company to list on the Nasdaq, at a valuation of more than $1 billion. 

Cayman Islands-registered Canaan was touted as one of the world’s largest manufacturers of the ASIC devices used to mine cryptocurrency. Now it is being sued by one of its stockholders for violating US security laws, after its share price tumbled from $9 to around $4.70, despite a brief unexplained surge in CAN in mid-February.

On Wednesday, Phillippe Lemieux, an investor in Canaan, filed a class-action lawsuit against the company in an Oregon court. The suit alleges that Canaan had issued a slew of false and misleading statements to make its financial health appear better than it was while hiding information that might have been pertinent to investors. Lemieux is seeking yet unspecified “compensable damages” as a result of the alleged violation of securities laws.

Canaan filed its intentions to go public with the US Securities and Exchange Commission on Oct. 28. It went on to list on Nasdaq under the ticker name CAN. Though it raised only $90 million of its intended $400 million target, the listing was big news for the crypto space.

According to the lawsuit, Lemieux purchased 200 shares of CAN on Feb. 12 at $8.50 apiece near the stock’s all-time high. Citing at length a blog post titled “Canaan Fodder”published by short seller Marcus Aurelius (MAV), the complaint stated that Canaan misled investors in its IPO filing.

The MAV post unearths disturbing details of Canaan’s listing and notes that Canaan had three previous unsuccessful listing attempts on Asian exchanges since 2016. MAV called Canaan’s  Nasdaq listing a “the company’s dumping ground of last resort.”

In addition to Canaan, the lawsuit also names the firm's underwriters for this IPO as defendants, including Galaxy Digital, China Renaissance Securities, Huatai Financial Holdings, CMB International Capital, and others. Notably, one of the original lead underwriters Credit Suisse backed out of the deal a few days before the IPO. MAV called this “highly unusual because investment bankers are notoriously reluctant to walk away from fees.”

Allegations against Canaan

Among the allegations in the complaint, Lemieux said that three weeks prior to its Nasdaq listing Canaan misleadingly labeled a $150 million purchase agreement with a Cayman Island-registered company called Grandshores as a “strategic partnership.” But it turns out that Grandshores’ chairman and executive director, Yao Yongjie, is a shareholder in Canaan, owning 9.7 percent of the company’s outstanding shares, according to an SEC filing.

But this transaction isn’t listed in Canaan’s SEC filings, so the relationship is not acknowledged. MAV said it views the Grandshores announcement as “largely bogus,” and that it “was used by Canaan as a device to hype its financial prospects to investors.”

The lawsuit also claims that some of the company's stated clients are not in the bitcoin mining industry at all. According to MAV, Canaan reports that more than 87 percent of its sales are to customers in China, but that’s in sharp contrast to Bitmain, which attributes only 33% of its sales to China. 

“The quality and durability of CAN’s Chinese customer base is therefore of paramount importance for investors. This is exactly why we were disturbed to find that, in addition to related parties, other major customers identified in the Chinese listing documents filed by CAN include businesses that appear to be in entirely different industries,” said MAV.

And then there’s the question of what happened to Canaan distributors. Eight of the 10 official distributors disappeared from Canaan’s website just prior to the IPO. MAV said in their review of seven of the deleted distributors reveals that “most appear to be small, defunct, or otherwise incapable of buying material amounts of product from CAN.”

Rosen Law Firm, which is representing Lemieux and put out an announcement about the lawsuit on March 3, is calling for more Canaan investors to join the class action. Meanwhile, a host of law firms have announced investigations into similar claims of securities laws violations by Canaan over the past couple of weeks.