Shares of Luckin Coffee dropped 36% early Wednesday in its first day of trading since it was halted in early April over reports of fraud. Now facing a potential delisting from the Nasdaq altogether, investors are racing out of the company, reducing a business once valued as high as $12.7 billion to a fraction of its former glory: $731.5 million.
The delivery-first coffee upstart once wowed investors with ambitious plans to go toe-to-toe with Starbucks in China. But instead of a sprawling café empire, the three-year-old company served up massive fraud in its accounting books, revealing in April that it had exaggerated sales between the second to fourth quarters of 2019 by $310 million. Luckin fired CEO Jenny Zhiya Qian and COO Jian Liu last week, while at least one of the underwriters in Luckin’s public listing was reportedly been pushed out of the starry WeDoctor IPO in part over the scandal.
Luckin said Tuesday that the Nasdaq plans to delist Luckin over “public interest concerns as raised by the fabricated transactions.” Luckin plans to request a hearing to appeal the decision, though shares will continue trading on the Nasdaq for the time being.
The selloff bodes ill for Luckin’s lenders. An entity controlled by Luckin chairman Charles Zhengyao Lu defaulted on a $518 million margin loan in April, leading banks to ink out plans to sell the collateral: some 76.3 million shares in the company now worth $226.6 million.
Revelations of Luckin’s fraud have also once again reinvigorated calls for greater scrutiny around the IPOs of Chinese companies in the U.S., an issue compounded by rising tensions between the two nations during the coronavirus.
In a filing with the Securities and Exchange Commission signed Monday, the Nasdaq proposed tighter listing standards for companies in areas that have “secrecy laws, blocking statutes, national security laws, or other laws or regulations restricting access to information by regulators of U.S. listed companies.” While the proposed rules did not call out China specifically, such changes would impact Chinese companies seeking a U.S. listing most heavily.