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Alleged corporate malfeasance: from profits to bankruptcy

Entrepreneurs are bound by state and federal laws. Yet, despite potential legal and financial consequences, human nature sometimes pushes the boundaries of regulation.

Coffee drinkers daily flood Starbucks locations around the globe. Within less than four years of incorporation, Luckin Coffee Inc. became a viable competitor in China. However, initial reports of success led to court.

Luckin only seemed lucky

Unlike Starbucks, Luckin’s business model incorporates three different types of store locations. It also embraces artificial intelligence for suggestive selling.

After an initial store launch in October 2017, the coffee company reported nearly 17 million “transacting” consumers by March 2019. An impressive growth rate has raised concerns multiple times in the business’ short life cycle. But why is a Chinese company garnering attention in the United States?

Luckin’s controversial history includes:

  • A variable-interest entity (VIE) that essentially created two structures – one for conducting business in China, the other a foreign-investment opportunity in the Cayman Islands.
  • Rapid expansion of more than $125 million in reported revenue during 2018. At the same time, a net loss of over $241 million, with plans to scale.
  • An initial public offering (IPO) in May 2019, with a first trade 47% greater than the company’s $17 IPO share.

However, jurisdictional differences between China, the Caymans and the U.S. held extreme risk for Americans interested in Luckin’s stock.

Less than one year after Luckin went public, Nasdaq delisted its stock due to alleged fabrication of financial statements and public interest concerns. The company fired an executive after accusations of $310 million in falsified transactions. Trading resumed roughly one month later.

First millions, then nothing, with investors caught in between

Most recently, the Chinese coffee chain filed Chapter 15 bankruptcy.

Efforts to restructure will likely consider $180 million in Securities and Exchange Commission (SEC) fines for alleged malfeasance in the form of misrepresented revenue. Meanwhile, Luckin seeks protection from at least $460 million of lawsuits involving U.S. shareholders and bondholders.

American regulators may need to revisit their scrutiny of international companies on the U.S. exchange. Meanwhile, while the retailer keeps businesses open overseas, financiers may wonder how, or whether, they’ll see a return on their investment.