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TheStreet Open House

Is Groupon a Scam or Just Misunderstood?

NEW YORK ( TheStreet) -- As beleaguered deals giant Groupon (GRPN) prepares to report second-quarter earnings Monday, investors are asking some poignant questions, including whether the company is a scam.

They're asking that in part because of the company's past accounting irregularities, and as they've delved into the past of Groupon's chairman and co-founder, Eric Lefkofsky.

As Fortune detailed last year, Lefkofsky has made lenders, investors and customers in some of his previous ventures angry enough to sue him. One lawsuit, which was later withdrawn, accused him and another company he co-founded, InnerWorkings (INWK), of "racketeering."

Fortune also related how Lefkofsky incurred the wrath of investors in a company called Ha-Lo Industries, which spent $240 million to acquire a company called Starbelly.com that Lefkofksy co-founded. Shortly after the acquisition, Ha-Lo filed for bankruptcy protection.

Considering that Lefkofsky profited handsomely from the sale of Starbelly, some investors may wonder whether Groupon's IPO was an attempt by insiders to cash out before the business hit the skids.

Another thing that has investors wondering whether Groupon is a scam is its business model: How can a company that puts its customers (in Groupon's case, merchants) at a disadvantage survive in the long run.

Since Groupon reached a six-month high of $25.84, the stock has lost more than 70% of its value.

I'm wondering whether this company will survive another year. I'm also wondering whether Groupon has a viable long-term business model.

A crucial question to ask is what exactly is Groupon selling. Just deals? Or an advertising platform? Or both? Do the merchants know the difference?

Some argue that successful and already well-established companies -- particularly restaurants -- do not use Groupon. Rather it is the typical start-up trying to make through its first or second year that sees the value in Groupon.

But these businesses risk losing 50%, 60% and sometimes 70% of their revenue just to get new customers. Is it worth it?

For Groupon, a related question is whether its business can survive by servicing predominantly start-ups, many of which may not survive themselves.

Groupon is accused of "preying" on these companies by using what are considered to be aggressive sales tactics and offering these new business entrepreneurs false hope. But is it Groupon's fault if these owners see value -- rightly or wrongly -- in what it is selling?

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