Apr 06, 2020 04:03 PM

Luckin Scandal Raises Questions Over China’s IPO Reform

What’s new: The financial fraud scandal at China’s largest domestic coffee chain, Nasdaq-listed Luckin Coffee, has raised questions over whether a registration-based IPO system is appropriate for the country’s market conditions.

Background: “We can’t say that the registration-based IPO system from the U.S. is invalid just because of Luckin Coffee’s scandal,” a senior executive at a securities firm said, after the chain’s shares went into free fall following its admission that its chief operating officer inflated 2019 sales by about 2.2 billion yuan ($310 million).

A registration-based system, in which companies and investors play the deciding role in the pricing and timing of an IPO, rather than regulators, was first trialled in China on Shanghai’s new Nasdaq-like STAR Market and given the go-ahead for wider implementation by an amendment to the country’s Securities Law in December. The amendment also added stricter information disclosure requirements for companies preparing to list.

A source from a financial regulator said that applying a registration-based system to all applications would obviously not be suitable for China. “After all, China’s supporting litigation mechanism is not complete, but it’s wrong to simply dismiss the registration-based system with information disclosure as its core.”

“Supervision and control is a short-sighted measure, and is difficult to put an end to fraudulent information disclosure. Only by truly adhering to market-oriented reform can we really make the market operate in an orderly manner,” the regulator said.

Lu Zhengyao, Luckin Coffee’s chairman, apologized for the scandal on Sunday via his WeChat account, writing that he was ashamed and distressed. “Personally, I blame myself. Regardless of the final findings of the independent committee, I will take on the responsibility that I should bear,” he wrote, adding that tens of thousands of employees across the country are still working normally.

Quick Takes are condensed versions of China-related stories for fast news you can use. To read the full Caixin article in Chinese, click here.

Related: In Luckin Debacle, Who’s to Blame for Missing Massive Fraud?

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