With a planned Hong Kong Initial Public Offering (IPO) on the horizon, Shein has disclosed that its operations in the USA are under investigation by the Federal Trade Commission (FTC). While Shein hasn’t said why the company is under investigation, it said that the outcome of the investigation may require it to make significant monetary payments.

This isn’t the first time that Shein has faced government scrutiny in the USA and other parts of the world for its business practices, as it has previously been hit with major fines and has been required to make settlement payments.

Shein Under Investigation in the USA

Shein, one of the largest global fast-fashion retailers, has said that its U.S. operations are currently being investigated by the FTC. The information was disclosed in the documents filed in connection with the company’s planned Hong Kong IPO.

While Shein had additionally planned to go for an IPO in New York or London, regulatory hurdles related to its supply chain shifted the plan to Hong Kong.

The company is cooperating with the FTC and has said that it may face significant fines as a result. Specifically, in the filing, Shein said that “The outcome of the investigation, whether in settlement ⁠or otherwise, may require us to make significant monetary payments that could have a material adverse effect ​on our financial condition and results of operations,“.

Shein made this disclosure because when a company prepares to sell shares to the public, it needs to honestly and openly list any potential legal and regulatory risks to possible investors.

The Reason for the Investigation is Unknown

While both the FTC and Shein have said that there’s an investigation into the company, the reason or cause for it is currently unknown. All there is to go on is that an FTC spokesperson confirmed that the agency is conducting a consumer protection investigation into Shein.

Normally, the FTC enforces U.S. laws against deceptive and unfair business practices. This may include deceptive app or platform designs, hidden fees, or the use of “dark patterns”, such as flash sales or countdown timers.

The specific reason behind the investigation may come out eventually, but until then, any guess is pure speculation. 

Shein’s Issues Extend Beyond This Investigation, and the USA Itself

Beyond this investigation, Shein has previously faced government scrutiny in the USA for its deceptive business practices, and has also made a $700,000 payment to settle a lawsuit over shipping delays in California. The Texas Attorney General also said in December that he was investigating the company’s manufacturing and supply chain practices.

While Shein is currently dealing with an investigation in the USA and has had other issues within the country, it’s not the only country that has had some run-ins with the company in the past.

For example, France recently hit Shein with a €22.5 million (around $26 million) fine for issues relating to product information, order confirmations, and returns. Before that, France had also fined Shein well over $200 million for things like deceptive business practices, which include placing cookies without consent and misleading discounts.

Also, in Germany, the German Retail Federation estimates that the likes of Shein and Temu cost the country €2.4 billion (around $2.7 billion) in economic value each year through low pricing that local sellers can’t match, as well as regulatory non-compliance.

Our Take

The Outcome of This Investigation Has a Major Impact on U.S. Ecommerce Sellers

While the investigation is still ongoing, the eventual outcome could be incredibly important for ecommerce brands and sellers in the USA. If Shein is forced to change or adapt some of its potentially deceptive business practices, it could level the playing field for American companies that have struggled to compete with companies like Shein since they entered the U.S. market.

Penalties and/or enforced compliance with U.S. consumer protection rules and regulations could also force Shein to adjust its pricing or change its tactics, which could help make it easier for domestic brands to narrow the gap.

Of course, there are also risks like more strict compliance, enforcement, and other burdens for sellers to deal with, or a ruling that gives Shein nothing more than a slap on the wrist that doesn’t lead to any real change.