Shein reveals that it is under investigation by the FTC while attempting to go public.

      Shein aimed for its Hong Kong listing to focus on growth. However, the filing intended to promote that narrative indicated that a US regulator is investigating the company, and Shein is remaining silent about the reasons. This information is included in the draft prospectus for Shein's upcoming IPO, as reported by Reuters. According to the filing, Shein's US operations are under scrutiny by the Federal Trade Commission (FTC), which has confirmed a consumer-protection inquiry. This marks the first public acknowledgment of the investigation.

      There is no specified target for the inquiry. Shein did not disclose what the FTC is examining but stated that it is cooperating and cannot predict the outcome or when it will occur. The warning provided to investors was more direct, noting that any resolution might lead to "significant monetary payments" that could have a "material adverse effect on our financial condition."

      The FTC oversees unfair and deceptive business practices, having previously taken action against other marketplaces and platforms, including Amazon and Coupang, regarding customer treatment. The agency has also challenged companies over practices that restrict consumer choices. Its cases have involved hidden fees, misleading pricing, difficult cancellation processes, and poor data management. However, none of this clarifies the specific allegations against Shein, even though it illustrates the type of issues the agency addresses.

      One significant area of concern is the FTC's ongoing battle against "dark patterns," as noted by CNBC. These are design tactics that manipulate users into making purchases or sharing their data. In a 2022 report, the FTC identified countdown timers as a classic example.

      Shein’s app employs these very strategies, utilizing countdown timers, gamified discounts, and time-limited flash sales, all intended to encourage quick purchases before consumers can reconsider.

      The FTC has not indicated that its investigation relates to these practices, but this situation creates an uneasy scenario for a company that is about to seek funds from public investors.

      This revelation comes at a particularly inopportune moment for Shein, following a lengthy and challenging path to market. The company initially sought listings in New York and London before finally securing approval from Beijing’s regulator for Hong Kong this month. Its target valuation of $40 billion to $50 billion is significantly lower than the approximately $100 billion it had in 2022, with some investors reportedly advocating for a valuation closer to $30 billion.

      Additionally, the company's financial performance has declined. Shein reported a $99 million loss in the first quarter, a sharp contrast to a $395 million profit during the same period last year. This downturn followed the US's elimination of the "de minimis" exemption that allowed low-cost parcels to enter without duties. US revenue dipped about 14% to $2 billion. Furthermore, the EU has implemented its own charge on low-value parcels, as reported by Forbes. In light of these challenges, a consumer-protection investigation from its largest market is the last thing Shein needed as it seeks to promote its narrative.