A view of Luckin Coffe in Guangzhou, capital of South China's Guangdong Province in December. Photo: VCG

Luckin Coffee, the Chinese challenger to US coffee giant Starbucks, is likely to face a $5 billion compensation claim from investors over its sales fraud scandal, a Chinese lawyer told the Global Times on Wednesday. That is a number the company will not be able to afford.

A delisting notice issued by NASDAQ on Tuesday will damage Luckin's business reputation and its financing in the market, said Shanghai-based lawyer Song Yixin, noting that it remains to be seen whether the move will shrink Luckin's business operations and lead to bankruptcy.

Luckin received a written notice from the Listing Qualifications Staff of the NASDAQ Stock Market on May 15, the company said in a statement. The notice indicated that NASDAQ has determined to delist the coffee chain's securities from its stock market.

Luckin Chairman Charles Lu Zhengyao said on Wednesday that he felt deeply disappointed over the delisting notice and that Luckin will make the utmost efforts to maintain the normal operations of its chain stores to recoup damages inflicted on investors.

Lu also reiterated his faith in the startup's business model and logic, saying its revenues had climbed year by year since establishment.

Luckin was founded in June 2017 and had nearly 5,000 cafes in China by the end of last year, surpassing the then number of Chinese outlets owned by Starbucks.

The company plans to request a hearing before a NASDAQ panel. A hearing is typically scheduled 30-45 days in advance, according to the NASDAQ notice.

There is little chance Luckin will reverse its situation at the hearing, and it will enter a period of privatization after delisting, Chinese lawyers said.

Song said that Luckin could not afford a $5 billion compensation claim - a figure roughly calculated based on investors - given its comparatively low insurance level.

Hao Junbo, a lawyer with the HAO Law Firm in Beijing, told the Global Times on Wednesday that most cases like Luckin's will seek settlements, hoping to reach a satisfactory compensation rate. 

"So far, five individual investors have reached out to us regarding litigation claims on a class action basis to recoup damages from the company," said Hao, noting that some investor's damages could be as high as $3 million.

Luckin shares slumped 50 percent in pre-market trading on Wednesday.