luckin coffee

Luckin Coffee, an interesting little tale

Not sure if I’m right here but I think I am:

The problem with any and every scam is how do you collect? It’s trivially easy to create fake letters of credit, for example, but getting a bank to pay out on one is more difficult. Fake stock certificates the same, kiting checks and all the rest.

Someone, somewhere, has to be convinced to give you real money for there to be a profit in it.

At which point, stock which is quoted on an exchange can be used as security for a loan. Depends upon the market the quote is on but an OTC stock might be good for a 50% of market valuation loan, the stock being the security. Nasdaq stock for maybe 80, or 90%, no hard and fast rule here.

It’s very difficult to gain permission from your investors to use stock in a VC funded company as security for a loan. Sure, for a small amount, to buy a house and a car maybe. Who would want the wunderkind building the next world beater to be sleeping in the park and coming to work on a skateboard?

Flotation on an exchange opens the floodgates
Once the stock’s on a recognized exchange, then it can be used as security for a loan. And that loan can be much greater than any amount of stock anyone will let you cash in.

And that’s what my opinion is. Sure, there are stores across China. By the company’s own admission they’ve near no daily revenue. But through that flotation the management team was able to borrow that half billion using the stock as security. Security which said management team had a good idea – in my opinion of course – was worth rather little and could be happily left in the hands of the banks in return for the half a billion being cashed out.