【Observation】Luckin Coffee Plunges Again! Chinese Companies' Listings or Fundraising in the US Will Become More Difficult, What are the Issues?

Luckin Coffee, a subsidiary of Luckin Coffee Inc. (Beijing) successfully went public on the U.S. Nasdaq in May 2019, raising $560 million in its IPO. However, in late January 2020, the company came under investigation after Muddy Waters, a research firm, revealed financial data manipulation. As a result, trading of Luckin Coffee on the U.S. stock market was halted on April 8th. Yesterday (5/20), Luckin Coffee resumed trading but still faced a grim fate with a closing price plummeting by 35.76%. Another Chinese mining company, Canaan Inc., has also been targeted by short seller reports recently, citing poor profitability and overvaluation.

Reports indicate that Canaan Inc., a leading Bitcoin mining equipment manufacturer listed in the U.S., is also under scrutiny with a short seller report questioning its profitability and high valuation. Since its listing in November 2019, Canaan Inc.'s stock price has halved.

What are the issues with Chinese companies going public in the U.S.?

The escalating U.S.-China tensions have brought economic blockades, political interference, and trade disputes into the spotlight. The recent scandal involving Luckin Coffee in the U.S. led the U.S. Senate to pass a bill, the Holding Foreign Companies Accountable Act, on Wednesday (20), which could restrict Chinese companies from listing in the U.S. or fundraising from U.S. investors without stringent auditing and supervision. The bill still needs approval from the House of Representatives and the signature of the U.S. President Trump to become effective. This legislation needs further approval from the House and the signature of the U.S. President Trump to take effect.

According to Voice of America, the U.S. Congress established the Public Company Accounting Oversight Board (PCAOB) in 2002 to ensure companies listed on U.S. stock exchanges have accurate financial and corporate records. However, Chinese companies often use "national security" as a reason to evade or not cooperate with auditing mechanisms, and China is the only country that has not reached an agreement with the PCAOB.

Trump recently mentioned in an interview that although he is closely monitoring the compliance of Chinese companies, he does not want to delist them from the U.S. as it may drive these companies to list in London or Hong Kong. He does not want to lose companies like Baidu or JD.com in the process.

In fact, such moves are already happening, such as Alibaba's secondary listing in Hong Kong.

Is it related to blockchain?

One aspect is the issuance of security tokens (STOs), which has a wide range of applications, with "tokenizing stocks" being one of its goals. Different countries have varying regulations for securities trading, coupled with political considerations, making securities trading increasingly "de-globalized." Securities exchanges based on blockchain and cryptocurrency may thus become a new arena for global securities trading.

However, due to issues involving multi-national regulatory standards, consumer protection, anti-money laundering, and other factors, achieving a globally liquid and inclusive securities trading market may still have a long way to go.

On the other hand, there is the "securities registration exemption." The U.S. Securities and Exchange Commission (SEC) has various fundraising regulations for small businesses or startups, allowing them to raise funds from U.S. investors under certain conditions without meeting high financial and legal standards or registering securities. Many Chinese companies also raise funds in the U.S. through this path or raise funds globally under the halo of SEC's "securities registration exemption." If the aforementioned bill passes, it may indirectly affect companies using this route.