TLDRs;
- Nio (NYSE: NIO) shares extend 10% loss as GIC sues over alleged securities fraud.
- Lawsuit claims Nio inflated revenue via battery transfers to Weineng, its partner firm.
- GIC seeks court recognition of Weineng as a Nio-controlled entity under VIE rules.
- Case paused amid a related U.S. class action, leaving investors cautious about Nio’s outlook.
Nio Inc. (NYSE: NIO) shares continued their downward spiral on Friday, slipping more than 4% in pre-market trading after a sharp 10% drop on Thursday.
The sell-off follows news that Singapore’s sovereign wealth fund, GIC, has filed a U.S. lawsuit against the Chinese electric vehicle (EV) maker, alleging securities fraud tied to its accounting practices and control over a key battery asset firm.
GIC’s lawsuit claims that Nio and two of its top executives inflated revenue and profits by prematurely recognizing battery sales and concealing their control over Weineng Battery Asset Co., a partner entity that supports Nio’s Battery-as-a-Service (BaaS) model. The fund alleges these actions misled investors, contributing to investment losses and distorted financial statements.
The lawsuit, filed in a U.S. federal court, adds fresh uncertainty to an already volatile period for Nio investors. Analysts say the legal action could deepen scrutiny on the company’s financial transparency just as competition in China’s EV market intensifies and global investor sentiment remains fragile.
Battery Partner Weineng Under Spotlight
At the center of the legal dispute lies Weineng, a company jointly created by Nio and several institutional partners to manage the automaker’s innovative battery swap business. While Nio holds less than 20% ownership in Weineng, GIC argues that the automaker retained substantial operational control and an “actual economic interest” in the company.
According to the lawsuit, Nio’s decision to record large upfront revenues from battery transfers to Weineng in Q4 2020, which helped double its year-over-year revenue to 6.64 billion yuan, may have violated U.S. accounting standards. GIC claims this accounting maneuver artificially inflated Nio’s financial performance and misrepresented its true earnings power.
In response, Nio maintains that it complied with all relevant accounting standards and properly transferred ownership of the batteries to Weineng. The company insists that its financial disclosures were made in accordance with international rules and that it had no intent to mislead shareholders.
Broader Implications for Chinese EV Makers
The lawsuit comes amid growing regulatory scrutiny of Variable Interest Entity (VIE) structures, corporate frameworks often used by Chinese companies listed abroad to circumvent restrictions on foreign ownership. GIC’s filing urges the court to classify Weineng as a VIE under Nio’s control, which would require its financial results to be consolidated within Nio’s accounts.
If successful, the case could have far-reaching implications for how Chinese EV makers and other tech firms report revenue under similar arrangements. The U.S. Securities and Exchange Commission (SEC) has already stepped up oversight of VIE disclosures, pressing for clearer ownership links and stronger accounting transparency.
Industry observers believe a consolidation ruling would force Nio to spread battery revenue recognition over the duration of its rental contracts rather than booking it upfront, potentially reducing reported revenue and profit margins in prior quarters.
Legal Pause and Investor Reactions
For now, the GIC lawsuit remains on hold, pending the outcome of a related U.S. class-action case involving Nio. Market analysts note that the pause offers temporary relief for the EV maker but leaves lingering uncertainty over potential liabilities and reputational risks.
Despite the legal setback, Nio continues to expand its global footprint, including plans to strengthen operations in Europe and invest in next-generation battery technologies. Still, with its share price now hovering around $6.57 in pre-market trading, investor confidence appears shaken.
Should courts side with GIC, Nio could face restatements of earnings and tighter accounting scrutiny from regulators, a scenario that might ripple across the entire Chinese EV ecosystem.
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