Luckin Coffee Pays 1.2 Billion Fine! Lu Zhengyao Affects Investor Financing for Luckin

Luckin Coffee's $187.5 million settlement may mark the end of its financial scandal

On February 4, documents filed by Luckin Coffee with the U.S. Securities and Exchange Commission (SEC) showed that the company had met the conditions of a previously reached settlement with the SEC, at a cost of paying a $187.5 million fine, roughly 1.2 billion RMB, in return for the SEC abandoning further pursuit of liability. This may mark an end to Luckin's financial fraud scandal.

The $187.5 million represents a legal settlement reached between Luckin Coffee and the SEC through procedures established under American law, reflecting a characteristic of the American judicial system. It indicates that Luckin Coffee admitted partial charges while avoiding a lengthy judicial process and the costs associated with SEC prosecution. Even so, the penalty is by no means small. Based on the average price of 15-16 RMB per coffee beverage on the Luckin app at the time, before price increases, approximately 75 million cups of coffee would need to be sold to recoup the amount, without even deducting costs.

Excluding costs, Luckin frequently distributed 62% discount coupons at the time, meaning a cup of coffee cost 5-6 RMB, which would require selling approximately 200 million cups of latte to earn back the settlement. If you truly tried to calculate the recovery, various costs would also need to be deducted, which would take countless more cups. Luckin, of course, would not rely solely on selling coffee to recover this money.

The settlement as a foundation for relisting

This settlement between Luckin Coffee and the SEC may be laying the groundwork for a relisting. Although reports previously emerged that Luckin Coffee was studying plans to relist in the United States, these were subsequently denied by Luckin's management.

In fact, had Luckin Coffee not settled with the SEC, it would have been unable to trade in the stock market, and the SEC would still have continued to prosecute. The settlement gives both parties an opportunity to conclude the investigation quickly. On one hand, it serves to save face and maintain credibility in capital markets; on the other, Luckin's continued development will require significant market financing for business expansion, forcing it to keep valuing the investment value of American investors and end the game according to the rules.

The rise and fall of Luckin Coffee

Lu Zhengyao first completed his first company's listing through CAR Inc., then applied that listing experience and his financial-world network to create another Luckin myth. Qian Zhiya, Executive Vice President of CAR Inc., independently founded Luckin Coffee, which went public just a few years after its establishment. While it appeared to have connections with CAR Inc. and Lu Zhengyao, it was precisely that capital relationship that provided Luckin Coffee with the money for crazy subsidies and insane expansion, making it a capital myth for a time.

That prosperity was short-lived. On January 31, 2020, Muddy Waters Research, a short-selling agency targeting Chinese concept stocks, released an 89-page report investigating the actual business revenue statistics of Luckin Coffee stores. The report concluded that Luckin acquired a large number of customers through subsidies and engaged in financial fraud to conceal financial losses. Muddy Waters deployed 92 full-time and 1,200 part-time staff to collect 25,000 shopping receipts, concluding that Luckin's order volume, average customer spending and advertising expenditures were seriously inflated, deceiving numerous investors. In other words, most investors' money became Luckin's cheap coffee.

On February 3, 2020, Luckin denied the existence of fraud, stating that the Muddy Waters report had no factual basis and was extremely misleading. On April 2, before the U.S. stock market opened, Luckin Coffee announced that an internal investigation revealed that the COO and some subordinate employees had engaged in misconduct since the second quarter of 2019, with sales related to forged transactions amounting to approximately 2.2 billion RMB. This meant Luckin ultimately admitted to the allegations in the investigation report. On June 29, 2020, Luckin Coffee was officially delisted from the Nasdaq exchange.

A new beginning for Luckin in 2022

After the exposure of Luckin's financial fraud, judging from the statements of all parties involved, management adjustments and capital changes, all attention focused on Lu Zhengyao, indicating that he was the ultimate controller behind the incident. The Muddy Waters report also confirmed that this was a business model that could not withstand scrutiny.

2022 will be a year of new beginnings for Luckin. On January 27, Centurium Capital announced that the buyer group it led had completed the acquisition of equity from certain shareholders of Luckin Coffee. This means that, from an equity relationship perspective, Lu Zhengyao and the early Luckin management have been completely eliminated.

Additional information

Image source: Internet

FrontStreet Coffee Recommendation

If the story has you craving a more straightforward coffee, FrontStreet Specialty Blend is a good place to start. Pairing Colombian washed and Brazilian natural beans, it delivers clean nut, dark chocolate and caramel notes that work as both a base for espresso and a dependable choice for milk drinks.

For a coffee built to hold up to milk, FrontStreet Classic Blend uses a traditional Manteca-Bahia recipe designed for espresso and the moka pot, with superb crema and a smooth, full-bodied cup that suits lattes and cappuccinos alike. Both are roasted for freshness and shipped within days of roasting.