SenseTime postpones its Hong Kong IPO after Washington blocked U.S. investment in the facial recognition giant

In a filling to the Hong Kong Stock Exchange (HKEX) Monday, SenseTime said it “remains committed to completing…the listing soon” but announced it would refund all share sale payments the group received during its IPO pricing last week.

U.S. institutional investors Fidelity and Qualcomm own small stakes in the firm, while American private equity firm Silver Lake holds a 3% stake in SenseTime. Other major investors include Japan’s SoftBank and Chinese venture capital funds.

The U.S. Treasury Department added the group to a list of “Chinese military-industrial complex companies” that U.S. companies and individuals are prohibited from investing in on Friday—the day SenseTime was due to price its IPO. The Treasury Department says SenseTime’s technology enabled “serious human rights abuses” in China’s Xinjiang province, where authorities have used facial recognition technology to monitor the local minority Uyghur population.

SenseTime, in a statement, said it strongly “opposes the designation and accusations that have been made in connection with it.” Nevertheless, the U.S. blacklisting was enough to derail the startup’s listing plans, which the tech group has been working toward since 2019.

China has a handful of homegrown A.I. powerhouses known as the four A.I. “dragons”—namely SenseTime, Megvii, Yitu, and CloudWalk—but none have successfully turned a profit or listed, yet. Bruce Pang, head of macro strategy and research at China Renaissance Securities, says a successful SenseTime IPO could have paved the path for other Chinese A.I. firms looking to go public and raise funds, particularly in Hong Kong.

Instead, SenseTime’s postponed listing exposes the increased hurdles Chinese A.I. firms face in fundraising via a traditional IPO—even in a market like Hong Kong—and raises further questions about the decoupling of U.S. and China’s capital markets.

Blacklist

Chinese computer scientist Xu Li and information engineering professor Tang Xiao’ou founded SenseTime in 2014, after meeting through work at the Chinese University of Hong Kong (CUHK). According to the group’s prospectus, SenseTime is now the largest A.I. software group in Asia in terms of revenue, generating $530 million in sales in 2020.

SenseTime’s signature DeepID technology, which the group says can recognize a face with 99.15% accuracy, generates the largest proportion of the company’s income. But SenseTime’s success in pioneering facial recognition tech has also embroiled the company in a new era of controversy.

In October 2019, the Trump administration placed SenseTime and 27 other Chinese firms on the U.S. Bureau of Industry and Security (BIS) Entity List for import bans, citing the companies’ roles in “human rights violations and abuses.”

The U.S. BIS said Chinese public security agencies have used DeepID to enable Beijing’s “campaign of repression, mass arbitrary detention and high-tech surveillance against Uyghurs, Kazakhs, and other members of Muslim minority groups in [Xinjiang].” At the time, SenseTime said it was “deeply disappointed” by the U.S. decision and that it was “actively developing our A.I. code of ethics to ensure our technologies are used in a responsible way.”

SenseTime had already moved to distance itself from any ties to Xinjiang before the Trump administration placed it on the Entity List, selling a 51% stake in Xinjiang-based surveillance firm Leon Technology six months before the Trump ban.

But Paul Triolo, practice head of geo-technology at political risk consultancy Eurasia Group, told Fortune in August that profitability and revenue growth “beyond government and security-related applications” remains a fundamental challenge for SenseTime and China’s A.I. firms.

A.I. dragons

SenseTime isn’t the only Chinese A.I. startup to face sanctions from Washington.

In 2019, the Trump administration included SenseTime’s fellow A.I. dragons Megvii and Yitu (CloudWalk was added last May); and SenseTime’s attempts to go public is a repeat of history, says Pang, citing Megvii’s 2019 aborted Hong Kong listing. Megvii had filed to debut on the HKEX in 2019, but local investors and activists petitioned the bourse not to approve the company’s listing. Megvii submitted a 600-page document to the HKEX’s listing committee outlining its “minimal” ties to Xinjiang, but ultimately refiled for a Shanghai STAR Market listing this March.

But the U.S.’s recent action against SenseTime signals that the pressure from Washington on Chinese tech firms is far from over, analysts say.

Washington could very likely place more Chinese A.I. and tech firms on its investment blacklist, given the possibility of geopolitical tensions between the two countries “re-escalating,” says Pang. Just last week, the U.S. announced a diplomatic boycott of the Beijing 2022 Winter Olympic Games in protest of Beijing’s human rights “atrocities.” Beijing responded that it would retaliate with “resolute countermeasures.”

Rising tensions will undoubtedly “cast a shadow on Chinese firms’ offshore listings,” Pang says, including both in Hong Kong and New York.

SenseTime, for its part, said in its official statement on Saturday that the company “regret[s] to have been caught in the middle of geopolitical disputes.”