Rocky Agarwal has to be feeling pretty vindicated right about now. He has been blogging about Groupon (s GRPN) and its business model, screaming that it has more holes than swiss cheese for almost 18 months. A report in the Wall Street Journal suggests that the Securities & Exchange Commission is looking into the company’s recent actions and that may lead to an investigation. Groupon recently revised its very first set of financial results.
The Journal reports:

The regulator’s probe into the popular online-coupon company is at a preliminary stage and the SEC hasn’t yet decided whether to launch a formal investigation into the matter, the person said.

The SEC decision to examine the circumstances surrounding Groupon’s surprise revision is the start-up’s latest run-in with the regulator. Groupon twice revised its finances before its November IPO. …Groupon shares plunged Monday, ending the day down nearly 17% at $15.27, far below its $20 IPO price.

Agarwal in a recent blog post, Why Groupon is poised for collapse wrote:

Well, for starters, it’s not a coupon company nor a marketing company. At its core, Groupon’s U.S. business is a receivables factoring business, as I wrote last year. They give loans to small businesses at a very steep rate (the price of the discount plus Groupon’s commission). They get the money to fund these loans from credit card companies such as Chase Paymentech. Groupon is essentially a sub-prime lender that does zero risk assessment.

Agarwal outlines some of the hilarity that has led to the most recent reinstatement.

Groupon is selling bigger and bigger deals and many of these have requirements for use. Some deals have medical qualifications. The former salesperson told me about Groupons for a procedure called “cool sculpting”. In this procedure, fat is frozen off the body. In order to get the treatment, patients must be medically qualified. But Groupon has no way of medically qualifying purchasers and will sell it to anyone. When they go to the doctor and find out that they aren’t eligible, they call Groupon for a refund. If this is several months later, after Groupon has paid out the entirety of what it owes the provider, this can mean a refund loss for Groupon.

You should read Rocky’s entire post and read through his archives to understand that Groupon as a company shouldn’t have even gone public. After you have done that maybe then you will see that the dead-pan humor of CEO Andrew Mason that made him the darling of media was actually hiding his cluelessness.

The problems don’t end there, of course, as Anthony Catanach Jr. & J. Edward Ketz, two accounting professors point out on their blog:

Well, first of all, the Groupon’s earnings revision which was prompted by an increased reserve requirement for customer refunds, highlights the subjectivity and uncertainty associated with any accounting assumptions (or judgments) made by relatively “new” companies, operating in “new” industries, with inexperienced management: yes, internet companies! In short, internet company accounting is suspect given all the unsupported assertions and assumptions that must be made to comply with generally accepted accounting principles, not to mention the likely internal control weakness issue.

Next, we question whether there is any real corporate governance at Groupon whatsoever. Usually, when material weaknesses surface, heads roll … not at Groupon! Instead, the board of directors rewarded the Company’s chief financial officer with a salary increase and bonus.

The tragedy of this episode is that the actions of Groupon, which is hardly a technology company, might end up spooking the entire IPO market. There are many legitimate technology companies that are looking to go public in the coming 12 months and revive the Silicon Valley ecosystem.