It was one of the fastest-growing startups in modern history and one of the most anticipated IPOs of 2019. But now, following the company’s disclosure of a potential fraud of hundreds of millions of dollars, Luckin’s journey is starting to meet its end.
The company, in a statement today filed with the SEC, said that it would not contest Nasdaq’s decision to delist the company after having received two notifications in recent weeks of the stock exchange’s desire to push the China-based coffee chain from its market. It will officially stop trading Tuesday morning, meaning that Monday is your last day to trade LK, at least for the time being.
The saga of Luckin was an extraordinarily exciting one. Here was a barely two-year-old startup that was launching coffee “shops” and delivering cups of coffee faster than international incumbent Starbucks, which it had overtaken in total locations in China despite the latter’s multi-decade foray into the Middle Kingdom as it tried to convert local Chinese consumers from traditional tea culture.
That growth led to a huge surge of interest from Wall Street for the company’s debut last year, and the company’s stock soared as its growth reached more dizzying heights. There was just one problem: little of that growth was apparently real.
This April, the company’s board started to investigate a $300 million fraud within its accounting books, discovering that the company had inflated sales by essentially having affiliated companies buy large orders of coffees that never got delivered. The tactic boosted sales figures and total transaction volume while helping the company’s margins look great (seriously, if you haven’t tried it, selling nothing for something is a great margin business). Of course, that’s fraud when you put it on a 10-K form and submit it to the SEC.
That led to a huge surge of consumer downloads of the company’s app, as its customers lined up to try to exchange their coupons and other giveaways for actual coffees before the company collapsed.
Now, with the company’s delisting imminent, there are huge concerns about the quality of the accounting standards in the United States and around the world. The United States, through the Public Company Accounting Oversight Board, has limited ability to actually verifying company records in China, which means that fraud scandals like Luckin have repeatedly happened despite the verification of auditors like EY, which is Luckin’s auditor.
Congress is now working on legislation that would require local access to company documents and metrics, to help shore up what is clearly a black eye for the U.S. markets.
But Luckin’s fraud isn’t the only one that reached its denouement this week. German fintech payments company Wirecard officially announced its insolvency this week in a Munich court, which is likely to stiff creditors billions of dollars on loans. It was a huge failure for Germany’s innovation scene, where Wirecard had been a rare upstart among the country’s Dax 30 index of top companies.
As for Luckin — more drama seems to be unfolding. Banks are trying to reclaim what assets they can from the company and its chairman, Lu Zhengyao. Maybe the company will have more … luckin’ going forward.