A securities class action has been filed against Zhangmen Education Inc. (ZME) on behalf of purchasers of Zhangmen American Depositary Shares in or traceable to Zhangmen initial public offering conducted on or about June 8, 2021 (“IPO”), pursuant to the IPO prospectus (the “Prospectus”) and Form F-1 registration statement, as amended (together with the Prospectus, the “Registration Statement”). This case has been filed in the USDC – S.D.N.Y.
Zhangmen Education provides personalized online tutoring services to K-12 students in the People’s Republic of China (“PRC”). The rapid rate of growth in PRC’s online education market has led to a sharp rise in fraudulent activity, including false advertising, fabrication of teacher qualifications, exaggerated student performance, and price fraud. In response to these scandals, the Chinese government sought to clean up the industry by adopting stringent new regulations shortly before the Zhangmen Education IPO. But as the Zhangmen Education class action lawsuit alleges, the true scope and effect of these proposed measures were known to but undisclosed by defendants prior to the IPO and were reasonably likely to have a material adverse effect on Zhangmen Education’s business and future operating results.
Specifically, the Zhangmen Education class action lawsuit alleges that the IPO’s Registration Statement failed to disclose that: (a) PRC authorities were in the process of implementing sweeping new regulatory reforms on the private education industry in China including, among others, prohibitions on: (i) profit-making by private education companies, (ii) engaging in core-curriculum tutoring on weekends and vacations, and (iii) capital-raising by companies like Zhangmen Education; (b) the known risks, events, and uncertainties noted in the Registration Statement were reasonably likely to have a material adverse effect on Zhangmen Education’s business; and (c) based on the foregoing, the statements in the Registration Statement concerning Zhangmen Education’s historical financial performance, market demand, and industry trends were materially incomplete, inaccurate, and misleading.
On July 23, 2021 – less than two months after the IPO – PRC unveiled a sweeping overhaul of its education sector, banning companies that teach the school curriculum from making profits, raising capital, or going public. These drastic measures effectively ended any potential growth in the for-profit tutoring sector in PRC.
Then, on July 26, 2021, Zhangmen Education issued a release providing an update on the new PRC policies, admitting among other things that Zhangmen Education expected “the Guidelines to have material impacts on our existing business operations, financial condition and corporate structure.”
Thereafter, on August 25, 2021, Zhangmen Education issued a press release providing a further update on similar policies implemented by the Shanghai government and the implications for Zhangmen Education’s business, stating for example that: (a) “No new provider of after-school tutoring services on academic subjects in China’s compulsory education system (‘Academic AST’) will be approved, while existing Academic AST providers shall be subject to review and re-registration as non-profit organizations”; (b) “Tuition fees for Academic AST shall follow the guidelines from the government to prevent any excessive charging or excessive profit-seeking activities”; and (c) “AST advertising shall be subject to enhanced oversight.”
Finally, on November 19, 2021, Zhangmen Education announced that its auditor, Deloitte Touche Tohmatsu Certified Public Accountants LLP, had voluntarily resigned.
Subsequent to the IPO, the price of Zhangmen Education ADSs plummeted. As of the filing of the Zhangmen Education class action lawsuit, Zhangmen Education ADSs trade more than 80% below the IPO price.