Charles Zhengyao Lu, President and Founder of Luckin Coffee, and Jenny Qian Zhiya, CEO of Luckin Coffee, ringing the opening bell during the company’s Initial Public Offering (IPO) at Nasdaq in New York on May 17, 2019.
Victor J. Blue | Bloomberg | fake pictures
The Luckin Coffee fraud scandal was a “great morality story” for the markets, and more needs to be done to protect US investors from such cases, said an analyst, who said a bill to exclude companies. Chinese in the United States is essentially useless.
“It is a great morality story. It seems to me that those of us who spent time in China were able to see early on that Luckin was inflating his numbers,” Anne Stevenson-Yang, research director at J Capital Research, told CNBC. .
“Luckin was a company that was terribly interested in memberships and tokens, and in the visible growth of pedestrian traffic to stores, but not real revenue,” he said.
Chinese coffee chain Luckin Coffee was listed in the United States last year. But it revealed in April that its chief operating officer made the company’s sales in 2019 at about 2.2 billion yuan ($ 310 million).
The fraud began in April 2019, a month before Luckin, China’s largest coffee chain, made its public market debut in the United States. Nasdaq’s listing raised $ 561 million. Additionally, Luckin sold 4.8 million shares in a secondary share offering in January at $ 42 a share, raising more than $ 380 million in new capital.
Shares of Luckin, which was sold as a rival to Starbucks in China, were withdrawn from the Nasdaq last Monday.
Bill Exclusion Too Slow To “Save” American Investors
As the fraud was uncovered, and amid a mounting wave of anti-Chinese sentiment in the US, the Senate passed a bill in May that could essentially ban many Chinese companies from listing their shares on US exchanges. or raise money from American investors.
Among other conditions, they would be subject to audits by US regulators for three consecutive years. If they do not comply, they will be prohibited from trading on the exchanges.
“The problem is that there are all kinds of incentives to raise money in China’s public markets, and there is no fraud penalty. So why shouldn’t you commit fraud to raise more money?
Anne Stevenson-Yang
research director at J Capital Research
“The problem is … it sounds good, but it’s a really slow process,” said Stevenson-Yang. “It requires three consecutive years of default … I think this will not happen in time to save American investors.”
He suggested that United States auditors should have “immediate and complete access” to audit documents. “If they are not given access, then companies should be eliminated immediately. Why wait three years?”
On the investors side, Stevenson-Yang said it is “a problem that the US markets should have been aware of since 2012, when we had an eruption of these China Hustle companies … which were obvious frauds, and then they were exposed and excluded from the list. ” She was referring to China Hustle, a movie that was made about Chinese fraud cases bought by unsuspecting American investors.
“The problem is that there are all kinds of incentives to raise money in China’s public markets, and there is no fraud penalty. So why shouldn’t you commit fraud to raise more money? There are all incentives to do so,” he said. . .
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