General
April 17, 2021
6 minutes read

China’s Luckin Coffee Gets $250M Investment After Fraud Fallout

Luckin Coffee, the once high-flying Chinese coffee chain startup that came crashing down on the heels of a major accounting…

Luckin Coffee, the once high-flying Chinese coffee chain startup that came crashing down on the heels of a major accounting fraud wherein it admitted faking revenue to the tune of over $300 million, appears to be attempting to bounce back even after its hefty troubles.

Luckin has said that it’s secured a $250 million investment commitment from two Chinese private equity firms, Centurium Capital and Joy Capital, both of whom were existing shareholders of the company before committing the funding. Under their set terms, they’ll purchase preferred shares of Luckin Coffee, which was delisted from the Nasdaq stock market last year and now trades over-the-counter.

Centurium Capital will invest $240 million while Joy Capital is ponying up a much smaller $10 million. The new capital for Luckin is akin to a bailout that the company hopes to use to rebound its business.

Unsurprisingly, Luckin says that it’ll use the new capital it just secured to help pay a hefty $180 million fine levied by the US Securities and Exchange Commission (SEC) on it late last year to settle fraud charges.

Additionally, Luckin will use the new capital to also organize its restructuring. It entered into bankruptcy proceedings this February.

Luckin was once on the face of it a high-flyer serving as a coffee chain challenger to the dominant Starbucks in the Chinese market. It was founded just in 2017 and grew rapidly to have over 4,500 stores by 2020.

However, Luckin’s outward look didn’t match its inward statistics, which was propped up with bogus revenue artificially created by a network of affiliated corporate entities. The company admitted faking sales to the tune of over $300 million and luring investors with bogus figures. In fact, it lured investors enough to raise $560 million from a US IPO and again $865 million in a post-IPO offering.

After it admitted faking sales, Luckin came crashing down from a peak market cap of over $12 billion to a few hundred millions and ended up getting delisted from the Nasdaq stock market where it traded as a penalty.

Now, it appears that Luckin hasn’t given up and wants to continue its business. Though, that’s hard to see as it has greatly eroded trust from its customers and investors with its accounting fraud saga.

In the spirit of a frothy stock market, Luckin surprisingly has a current market cap of $2.2 billion despite its woes. In fact, the company hasn’t even re-emerged from bankruptcy but nonetheless maintains such a large market value.