Investors offload stakes in Zhihu after regulator issues directive to ‘rectify’ business

Ten corporate investors sold stakes that add up to more than 78% ownership of Zhihu’s parent company on Thursday morning, according to business data aggregator Tianyancha. The sale took place three days after regulators said Zhihu released information unlawfully and summoned company leadership for a meeting.

The ten shareholders, which include Sogou and Tencent’s investment arm, sold their entire stakes in Beijing Zhizhe Tianxia Technology, the parent company of NYSE-listed Zhihu. All of the shares will be transferred to the founder and CEO of Zhizhe Tianxia, Zhou Yuan, who now owns more than 99% of his company.

As one of China’s most popular social media platforms, Zhihu went public in the US in March utilizing a VIE framework, which guarantees dividends flow to foreign investors while the business remains operated and controlled by Chinese entities.

Zhihu said that the selloff is a common practice among Chinese concept stock companies to streamline operations.

The departure of Zhizhe Tianxia’s investors comes after Zhihu hit a regulatory wall. On Monday, Zhihu was summoned by the Beijing branch of the Cyberspace Administration of China (CAC) for unlawful release of information. The regulator said in a statement that it has ordered the company to “rectify” its practices. Zhihu will suspend some of its functions during this period.

Zhihu’s case echoes the regulatory pressure that major social media platforms have felt in recent weeks, as China continues to tighten control of major internet and tech companies. Earlier this month, the CAC fined the social media app Douban RMB 1.5 million (USD 192,500) for publishing “unlawful information.” It was the 20th fine that Douban has received within a year, taking its cumulative penalty to RMB 9 million (USD 1.41 million).

Less than two weeks ago, Weibo Corporation, which operates its namesake microblogging service, was fined RMB 3 million (USD 471,151) by CAC, which said some accounts and content on the platform violated laws and regulations. Weibo has been slapped with 44 fines totaling RMB 14.3 million (USD 2.24 million) this year, according to the regulator.

In a bid to “clean up” the internet and step up control of the tech industry, the Chinese government will continue to scrutinize the sector and regulate its development, state media outlet QS Theory said in an article published on Thursday.